“Free” the Markets

As suggested last week, markets appear to be finding their footing. In fact, with last week’s close above trend, the S&P 500 may be looking to re-take its all-time highs in the next week or two. The question is why?

Aren’t we staring at an election year? Odds makers have Biden winning. Isn’t that a vote for a massive (and expensive) tax overhaul that will stifle the markets?

Maybe… but not yet.

In the short term… as in, the next few days… markets are betting on more stimulus. After all, FREE money means we don’t have real economic problems to deal with (there is no sarcasm font so you’ll have to read between the lines on this comment.) IF they’re right, it’s short-term lighter fluid on the stock market. Well, sort of.

A new round of stimulus probably bumps the markets to all-time highs, but the bump may be short-lived as the stimulus is sort of being baked into the prices already. Then we have to consider the ‘next’ thing the markets are going to think about, which is the possible tax fallout of a Biden win.

The POTUS probably isn’t the biggest concern. The Senate is. If it flips blue, the checks and balances that exist in the system stand to flip too. So a lot more extreme jockeying can take place.

Political opinion aside, the blue side of the aisle is on record as being in favor of higher corporate and personal taxes. A significant tax hike on either group, at least so far, does not appear priced into the markets. So you can do the math: new taxes, new headwinds… even in a TINA market.

Since investors are (rightfully) incapable of handicapping the outcome of the upcoming election, time horizons have shifted pretty short-term. So volatility is likely. And the tug-of-war will between fear of the upcoming election (FOTUE) and fear of missing out (FOMO).

For the week, looking for a continuation of last week. This means a close for the S&P 500 above 3523 will signal a re-test of the all-time highs for the index. Support is at 3419. And, given last week’s nearly 4% climb higher, it’s possible the index will challenge its all-time highs this week.

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