@theMarket: Election Unknowns Keep Markets on Edge

Markets vacillate between betting on a GOP sweep and a Democrat victory with little justification for either outcome. Don't get caught up in the frenzy.

 

The betting markets have Trump winning but they have been wrong in the past and it is easy to tip the odds one way or the other with a couple of big bets. The polls are no help either because the results are all within a margin of error that makes them useless.

 

Only 36 percent of the S&P 500 have reported third-quarter earnings. So far, 79 percent of companies have beat earnings by a median of 6 percent. Sales results have also been strong with 58 percent beating estimates. The corporate results have provided strong support to the markets. 

 

The ongoing Trump trade has seen areas such as precious metals, Bitcoin, and financials outperform as traders bet on a comeback in inflation and deregulation. The expectation that tariffs, as well as massive spending and tax cuts, are just around the corner are fueling the gains in these areas.

 

Gold and silver and the miners that produce them are finally seeing some profit-taking after an enormous run higher. That is a good thing. I still think asset class has more to go in the months ahead. As for Bitcoin, I am a bull on cryptocurrencies and believe both candidates will encourage the expansion of this "digital gold" if elected.

 

Overseas markets reflect the same ups and downs as the U.S. China has given back some of its recent gains as investors doubt that the government stimulus measures announced last month are enough to pull the country out of its economic slowdown.  If there is going to be another leg of stimulus, it won't happen until after the U.S. elections, in my opinion.

 

Economic data continues to show a strong economy, which puts pressure on the Fed to stand pat rather than cut interest rates again. New home sales gained 4.1 percent. Business activity in the Chicago and Kansas City region was better than expected, while the nation's services sector continued to expand. Initial jobless claims also fell by 20,000 jobs.

 

The final week in October is laden with macroeconomic data points. Information on consumer confidence, JOLTS job data, GDP, new home sales, the core PCE, unemployment claims, job payroll numbers, and manufacturing PMI, to name just a few. Any and all of the above can move markets, but so far most of the macro data and earnings results present a Goldilocks environment for the financial markets. 

 

In this environment, we could see sharp spikes higher and dramatic declines lower. The S&P 500 Index is running up against strong resistance zones right now. In the short term, I would like to see the S&P 500 Index take out 5,900. If so, we could see another 100 points upside in that index.   

 

Depending upon the election outcomes and possible post-election controversy, the downside range could be as much as 5-7 percent. If the election outcome is called into question, the decline could be steeper. What to do? Nothing. Sit on your hands and watch but if the market falls, I would buy the dip.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.