The S&P 500 (Index: SPX) closed the trading week ending Friday, 9 October 2020 at 3,477.13. That falls within three percent of its 3 September 2020 all-time record high close of 3,580.84.
The index rose, fell, and rose again with the prospects for another round of fiscal coronavirus stimulus coming from the U.S. government during the week. That action puts the level of the S&P 500 in the upper half of the latest redzone forecast range of the alternative futures chart - the latest update to which shows the projections of the dividend futures-based model through the end of 2020:
What the alternative futures chart doesn't yet show is what could result for markets following the outcome of the U.S. elections. Here, if candidate Joe Biden wins, we would anticipate a partial repeat of 2012's Great Dividend Raid.
That event was triggered in November 2012 after President Obama won re-election, which all but ensured an increase in federal income tax rates in 2013. Influential investors pulled ahead as much dividends as they could before the end of the year, which caused stock prices to rise sharply.
That would be the portion of the Great Dividend Raid we would reasonably expect to repeat during the fourth quarter of 2020 in the "Biden wins" scenario, because he has pledged to increase both personal and corporate income tax rates, and also the tax rates that apply upon both dividends and capital gains.
All these tax hikes would potentially devastate the market in 2021, but that would depend upon the actual tax changes that would be enacted. In 2013, President Obama's fiscal cliff tax deal raised personal income tax rates, but lower tax rates held for dividends and capital gains, making it advantageous for influential investors to channel investment returns through them rather than through personal income. With that fundamental support, the stock market avoided crashing and was able to grow.
We think things would be very different in 2021, given that Biden's political party has shifted so far to the left over the intervening years, which would all but ensure downward pressure on stock prices. To avoid crashing under the Biden tax regime, even more government-funded fiscal stimulus and more monetary stimulus from the Federal Reserve would be required to offset the contractionary impact of the tax hikes, which will need to be provided at levels several times larger than the projected changes in the amount of taxes to avoid that outcome.
Meanwhile, we wouldn't expect to see anywhere near the same tax avoidance-driven volatility in the market during the rest of 2020 or in 2021 if President Trump is re-elected. That is mainly because investors would not expect drastic changes to established tax policies and thus wouldn't need to "rush for the exits" before the end of 2020. It would also be less prone to crash in 2021, though that would depend in part on the Federal Reserve continuing to provide monetary stimulus. The Fed's minions sent out mixed signals on that count during this past week.
We don't think the chances of either presidential candidate winning is doing much to affect stock prices at this time, with stock prices more or less in a holding pattern outside of the influence of the noise from the fiscal stimulus negotiations. As a general rule, political events may contribute noise to the markets, but until major changes in tax rates become an immediate concern affecting investor expectations for the future, they won't contribute more than day-to-day noise to the S&P 500.
Speaking of investor expectations, here are the market-moving headlines we pulled from the past week's newstream:
- Monday, 5 October 2020
-
- Daily signs and portents for the U.S. economy:
- Oil jumps 5% on Trump health update, Norway shutdowns
- U.S. House Speaker Pelosi, Treasury Secretary Mnuchin spoke by phone on coronavirus aid
- U.S. service sector activity rises above pre-pandemic level in September: ISM survey
- Fed minion deploys sports metaphors:
- Bigger trouble developing in Euro zone:
- ECB minions slow buying of Euro nations' debt it really doesn't want to buy:
- Bigger stimulus developing in Mexico:
- Wall Street gains as Trump to leave hospital, investors hope for stimulus
- Tuesday, 6 October 2020
-
- Daily signs and portents for the U.S. economy:
- Oil ends up on supply issues, nixed U.S. stimulus talks a bearish sign
- Coronavirus aid hopes vanish as Trump ends talks with U.S. Democrats
- U.S. power use to drop over 2% in 2020 due coronavirus - EIA
- Fed minions not happy with "coronavirus economy":
- Powell: Coronavirus economy still at risk of downward spiral
- Fed's Harker: Recovery plateauing, return to old levels 'will take some time'
- Bigger trouble developing in the Eurozone:
- Bigger stimulus developing in the Eurozone, other positive signs of recovery:
- Exclusive: EU exploring using bond auctions for pandemic-linked debt sales
- German industrial orders rose at a 'remarkable pace' in August
- ECB's De Cos does not rule out extension and increase of ECB support measures
- ECB minion wants Euro-inflation to return to 2% target:
- Wall Street ends down 1% after Trump calls off coronavirus economic relief talks
- Wednesday, 7 October 2020
-
- Daily signs and portents for the U.S. economy:
- Oil falls 2% on U.S. stimulus impasse, stockpile rise
- U.S. starts forgiving pandemic loans amid criticism, uncertainty
- Pelosi and Mnuchin discussed standalone airline bill, to talk again
- U.S. lawmakers detail Big Tech's market abuses and press for strict reform
- ECB minion wants less stimulus:
- Fed minions struggling with existential questions:
- Fed could boost bond buys, but won't for now, policymakers say
- Split on applying new framework, Fed struggles over economic outlook as well
- Fed's Kashkari sees 'much worse' downturn without more fiscal aid
- Fed's Williams says moderate inflation overshoot acts as 'guard rail'
- Wall Street ends higher on hope that partial coronavirus stimulus deal may occur
- Thursday, 8 October 2020
-
- Daily signs and portents for the U.S. economy:
- Oil jumps on supply cuts in U.S. Gulf, wariness about North Sea, OPEC
- U.S. weekly jobless claims inch lower, but remain stubbornly high
- Trump calls for 'skinny' coronavirus relief bill: spokeswoman
- Fed minions signal tapering of government-issued bond buys in 2021, want more fiscal stimulus, still don't understand new inflation target policy:
- Fed's Kaplan rejects adding to QE, eyes eventual taper
- Fed's Kaplan rejects adding to bond buys, nods to future taper
- Wall Street firms see Fed tapering bond buys starting next year
- With no expectation of fiscal stimulus soon, Fed's Rosengren sees recovery hampered
- Fed's George: Framework 'less' a promise to engineer inflation than 'tolerance' of it
- ECB minions concerned for growth:
- ECB has to use available tools as pandemic hits inflation, de Guindos says
- ECB more concerned about growth than earlier feared: minutes
- Wall Street ends higher as Trump boosts hopes of stimulus
- Friday, 9 October 2020
-
- Signs and portents for the U.S. economy:
- Oil prices slip over 1% after Norway oil worker strike ends
- 'Treasuries on steroids': U.S. banks' mortgage bond trading bonanza
- Fearing Biden tax hikes, wealthy Americans rush to change estate plans
- Pelosi, Mnuchin fail to reach COVID-19 deal, but talks go on amid Republican doubts
- Fed minions may do more bond buys, still don't know what their new inflation targeting policy means, and want to cash in on digital cash:
- Fed's Evans Says More QE Coming "If The Recovery Slows Down"
- Split on applying new framework, Fed struggles over economic outlook as well
- Central banks sketch out digital currency as China forges ahead
- Bigger trouble developing as coronavirus spreads in countries that foolishly thought their lockdowns could beat it:
- French coronavirus infections set new record above 20,000 per day
- Canada at a tipping point in fight against coronavirus, says frustrated Prime Minister Trudeau
- More restrictions in cities inevitable if measures don't help: [German] govt
- As coronavirus surges, Europeans ask: 'where can I get a drink?'
- Wall Street finishes up as stimulus talks continue
Elsewhere, Barry Ritholtz listed the positives and negatives he found in the past week's economics and markets news.