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Markets ride the blue wave

Markets got a shot in the arm from fiscal stimulus expectations last week, but it's not negotiations between House Speaker Nancy Pelosi and the Trump administration that's got investors' attention — it's the largesse of spending expected from Pelosi, President Joe Biden and a Democratic Senate in 2021.

What's happening: Trump's polling numbers have fallen through the floor since the first presidential debate on Sept. 29.

  • They continued falling after his COVID-19 diagnosis was revealed Oct. 2.
  • Polls showed further declines after he announced on Twitter that he was pulling out of stimulus negotiations and backtracked within hours.
  • And they may fall further after a New York Times story released this weekend raised allegations of Trump illegally financing his 2016 campaign with a secret loan that exceeded legal limits.

The bottom line: "New surveys fall into two buckets: those that are bad for Trump, and those that are horrible," Politico notes in a recent analysis. The intrigue: Investors believe Trump will likely drag down Senate Republicans in tight races, as GOP-held Senate seats in Arizona, Colorado, Maine and North Carolina are heavily favoring Democrats, with Iowa now leaning toward the Democratic challenger.

  • Democrats need to net just three seats to get a 50/50 chamber split, with a tie-breaker held by the vice president.
  • Data from Raymond James puts the likelihood of Democrats taking control of the Senate at 66%, up from 55% before the debate, and FiveThirtyEight's average of national surveys puts the chances at 68%.

Listen to the market: The reflation trade that unwound in September leading to the fastest market correction in history for the Nasdaq has found new life since the presidential debate and particularly at the end of last week.

  • In addition to the Nasdaq and S&P 500 jumping more than 4% since Sept. 30, gold and silver have popped since Oct. 7 — with silver gaining 3.3% in just those two sessions — and the dollar index has declined.
  • Stocks and precious metals fell in September, with the S&P off by 4.5% and silver declining by 18% during the month. The dollar was up 1.7%.

One level deeper: Long-term inflation expectations also have picked up in recent days, boosting Treasury Inflation-Protected Securities prices.

  • The 30-year U.S. breakeven rate closed just above 1.85% on Friday, its highest since July 2019 and less than 15 basis points from the Fed's all-important 2% threshold, per Tradeweb.
  • The 10-year breakeven rate closed above 1.73%, up 13 basis points since the end of September.
Reproduced from the Committee for a Responsible Federal Budget; Chart: Axios Visuals

With a Democratic Congress, Biden is expected to add at least $650 billion dollars more to the deficit than President Trump would and up to $1.5 trillion over 10 years, according to a new analysis from the Committee for a Responsible Federal Budget.

  • And that doesn't even include pandemic-related spending.

Yes, but: For both campaigns, "considerable policy ambiguity exists," CRFB said in its analysis of the plans.

  • "The Biden campaign website features 48 different plans, most of which include dozens of individual policy proposals that overlap in some cases."
  • "We identified more than 800 distinct proposals."

Be smart: Long-dated U.S. Treasury yields also rose meaningfully at the end of last week on blue wave expectations, and higher yields (especially for the benchmark 10-year note) could prompt the Fed to expand its quantitative easing program to include more purchases of 10-, 20- and 30-year bonds, another potential boost for equities.

  • “There is still quite a bit of flexibility in the asset purchase side right now, and it allows us flexibility to also provide more accommodation if that's necessary,” Chicago Fed president Charles Evans told Yahoo Finance Thursday.

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