6 BARRON’S September 28, 2020
UP & DOWN WALL STREET
Election Day this year is a misnomer. Counting the
ballots could extend for days and weeks as a
result ofexpanded mail and early voting.
Hard-Ball Time
Nears for Baseball
...And Politics
A
t this time of year,
baseball normally
would be ending its
marathon 162-game
regular season and be
about to begin post-
season play, culmi-
nating in the World Series at the end
of October. This being 2020, nothing
is normal. After a Covid-abbreviated
60-game regular campaign, an ex-
panded roster of 16 teams will vie in
the playoffs, with the World Series
winding up in Arlington, Texas, home
of the Rangers, a team that won’t even
be in the playoffs.
The U.S. presidential race also en-
ters its final and most crucial stage
this week, with Republican President
Donald Trump facing his Democratic
challenger, former Vice President Joe
Biden, in their first debate on Tuesday
evening. That will be the culmination
of a seemingly endless process, even
longer than a normal baseball cam-
paign, that got under way with the
first debate among the Dems’ contend-
ers (and not a few pretenders) back in
mid-2019. In comparison, an ele-
phant’s gestation period is 18 to 22
months, and it takes 11 to 14 months
for a donkey’s foal to emerge.
The presidential and congressional
elections have been rumbling in the
financial markets’ background for
weeks, but are moving to the forefront
now. Friday also will bring the Sep-
tember employment report, the final
jobs data to be released before Elec-
tion Day, Nov. 3. The economic num-
bers this time might affect the political
world even more than the markets,
given the importance of voters’ pock-
etbooks on their election decisions.
Election Day this year is a misno-
mer, however, because counting the
ballots could extend for days and
weeks as a result of expanded mail
and early voting. The uncertainty
from what could be a delayed and
contentious tally is expressed in the
pricing of options well beyond Nov. 3.
The graph of implied volatility of
at-the-money options on the S&P
500 shows a “kink” in contracts ex-
piring in two-to-three months, says
Peter Cecchini, founder of Alpha-
Omega Advisors and former global
chief market strategist at Cantor
Fitzgerald. After that, the curve
slopes downward, indicating a per-
ception of receding risk. A year ago,
in contrast, the volatility curve sloped
gently upward to represent slightly
greater risk on options expiring on a
more distant date.
“Of course, it’s not just the elec-
tion,” he writes in an email. “Since
then, there’s been a pandemic and
recession.” Federal Reserve Chair-
man Jerome Powell has been espe-
cially explicit in calling for additional
fiscal policy assists for the economy,
which Cecchini suggests reflects a
lack of “monetary policy space,” with
the central bank already pinning its
federal-funds target rate near 0%
and buying $120 billion of Treasury
and agency mortgage securities each
month. Further adding to the options
market’s disquiet is Trump’s refusal
to pledge a peaceful transfer of
power should he lose the election,
Cecchini adds.
The chances of a pre-election fiscal
package are far from certain, espe-
cially with the coming contentious
confirmation fight over the Supreme
Court vacancy left by Justice Ruth
Bader Ginsburg’s death. However,
Treasury Secretary Steven Mnuchin
said on Thursday that he and Demo-
cratic House Speaker Nancy Pelosi are
continuing negotiations over a new
stimulus bill. Democrats are drafting a
$2.4 trillion measure, smaller than the
$3 trillion-plus Heroes Act passed by
the House in May, but still far larger
By Randall W.
Forsyth
The presidential
campaign will head
toward the home
stretch Tuesday
evening, as Donald
Trump and Joe
Biden face off in
their first debate.
than what Republicans have been
willing to support.
The GOP has resisted another mul-
titrillion-dollar deal since recent eco-
nomic data portray an apparent sharp,
V-shaped recovery. Early estimates of
the September jobs numbers to be
reported on Friday call for an increase
in nonfarm payrolls of 850,000 to
900,000, a robust gain but shy of the
previous month’s 1,371,000 jump.
(Hiring of temporary census workers
boosted August’s payrolls by 240,000,
while 40,000 of them were let go in
September, according to Capital Eco-
nomics’ estimates.)
The effects of the federal fiscal re-
lief thus far, notably the $2.3 trillion
Cares Act, are waning, with the end of
$600 weekly supplemental unem-
ployment benefits in August. With
prospects of further income support
fading, Wall Street economists are
sharply lowering their growth fore-
casts for the year’s final quarter. Gold-
man Sachs cut its fourth-quarter real
gross domestic product growth num-
ber in half, to 3% from 6%. JPMorgan
trimmed its estimate to 2.5% from
3.5%.
To be sure, that would follow what
could be a huge 30% annualized rate
of expansion in the current quarter,
which would still fall short of the
31.7% annualized contraction in the
second quarter, when much of the U.S.
economy was shut down.
While the markets will be watching
the world of politics, financial and
economic variables might have more
impact on the presidential outcome.
According to a new model constructed
by Strategas’ Washington policy strat-
egy team led by Dan Clifton, the in-
cumbent party candidate’s popular
vote results have been accurately pre-
dicted by four variables. These are the
S&P 500’s performance three months
ahead of Election Day; the value of the
dollar (weaker being better); the in-
cumbent’s approval rating; and the
state of the economy.
Strategas’ model has predicted the
popular vote of the incumbent party’s
candidate within 0.75 of a percentage
point since 1988. (Excluding the 2008
election during the Great Financial
Crisis, the margin was 0.18 of a point.) Chip Somodevilla/Getty Images ; Tom Brenner /Getty Images