Election day is upon us, and we think people should prepare for some volatility during the week’s trading. The government has already said that several districts will not be able to announce winners Tuesday night, causing much angst within the voting population.
Our bearish view of the market still holds no matter the result of the election. The inflation problem is systemic and persistent, in our opinion. It will take at least a year and probably two of the tight monetary policy plus something approaching a balanced budget to cure this disease. The monetary medicine is just getting dosed now but has much more to go. The fiscal treatment has yet to start.
With the country divided, someone will be very unhappy after the dust has settled. How people display their dissatisfaction may be a bit ugly to watch. At the same time, as the US is distracted by the election, China may aggressively move against Taiwan. We only put a 10% probability on it, which is more than zero. We do not know if you are away, but a good chunk of the population in Brazil is not taking the result of their well accusing Lula de Silva of electoral corruption. Hard to believe people would return him to power as he was hailed for corruption. But this is our world, and it is not a happy place.
As we play the bear market, we have suggested a healthy dose of bearish trades, some of which have fulfilled their promise. Three such trades are bearish trades on Services Now (NOW), Data Dog (DDOG), and Tesla (TSLA). Since these trades have done as much as possible, it is time to close them out. We think it is prudent to ring the cash register and close the trades that do not have much juice left in them.
There are always crosscurrents in the markets, and we have some trade ideas in our headlights. How the market trades in the days after the election is uncertain. The bear market may continue, which is our expectation, or it may have a big bounce if we end up with a divided government. The US economy usually does better when we have a divided government. Even if this is the case, we do not expect the bounce to last. Interestingly, we see a lot of articles in the financial media predicting a year-end rally. Buy the recent dip, they say, and keep hope alive. All that said, we would like to wait and see the election’s outcome before making the next move.
