Macro Week: Navigating Markets Ahead of the US Election

As we approach one of the most significant macro weeks of the year, investors are bracing for a perfect storm of market-moving events. With the US election, Fed meeting, and peak earnings season converging, understanding the potential outcomes and their market implications is crucial. Let’s dive into the key factors shaping the financial landscape and explore strategies for navigating this volatile period.

Market Overview: Setting the Stage

The past week has painted a mixed picture for markets, with broad indices showing resilience despite some notable sector-specific movements:

• Tech earnings have been a key driver, with Google’s strong performance offset by disappointing results from AMD
• Microsoft and Meta’s earnings, while solid, raised concerns about increasing AI research costs

• The US dollar continues to strengthen on robust economic data

• Gold and silver are pushing higher, supported by renewed ETF inflows
• Interest rates are trending upward, reflecting economic strength and inflation expectations

This backdrop sets the stage for a potentially explosive week ahead, with several critical events on the horizon.

The Main Event: US Election 2024

Current Outlook

The upcoming US election is undoubtedly the centrepiece of this macro week. Current prediction markets are showing:

• A strong lead for Trump, but remember prices are not probabilities….

• In line with the Presidential odds Polymarket shows higher likelihood of a “red sweep” compared to a Democratic victory

• However the polls continue to show a race that’s too close to call

Potential Scenarios

Three main scenarios are emerging, each with distinct market implications:

1. Trump Victory + Republican Congress: This outcome could lead to significant policy changes, including potential tax cuts. It’s generally seen as the most positive scenario for equity markets.
2. Democrat President (Harris) + Split Congress: This “gridlock” scenario might result in limited policy changes and could be marginally positive for equities.
3. Contested/Unclear Result: Perhaps the most concerning outcome for markets, a prolonged period of uncertainty could lead to increased volatility across asset classes.

Market Expectations

Interestingly, while equity markets seem relatively calm about the election (with implied volatility near yearly lows), the bond market is telling a different story:

• The MOVE index, which measures bond market volatility, is at record highs for a pre-election period
• This disconnect suggests that fixed income investors are more concerned about potential policy shifts and their impact on interest rates and inflation

Beyond the Election: Key Market Drivers

While the election dominates headlines, several other factors are poised to influence markets in the coming weeks:

Fed Meeting (November 7)

• A 25bps cut is fully priced in for the November Fed meeting, so don’t expect any surprises or reaction on the rate announcement.
• Powell’s press conference is key, as the market looks for hints on the post election playbook.
• Market participants will be closely watching for any shifts in the Fed’s stance on inflation and economic growth, will they acknowledge the stronger macro backdrop or keep their cards close

Peak Earnings Season

• Over 50% of S&P 500 companies are reporting this week

• Key tech names like Amazon and Apple round off the week
• Earnings results and forward guidance will be critical in shaping sector performance

US Jobs Report (November 3)

• Consensus expectations are for ~100k jobs created however the impact of two hurricanes and recent strikes make’s it a very noisy report with the chance of a large miss in either direction.
• The ADP report suggests potential for an upside surprise but keep in mind the one off factors
• A robust labor market could reinforce the “US exceptionalism” narrative and further support the dollar

Positioning for the Macro Week

Given the complex interplay of these factors, how can investors position themselves? Here are some key considerations:

Seasonal Factors

• November typically marks the beginning of a positive seasonal period for equities

• Mutual fund flows often turn positive in November due to fiscal year-end effects

• Company share buybacks tend to accelerate post-earnings season

• A word of caution though as managers seem extremely bullish and cash balances are low, what could possibly go wrong?

Gold and Silver Strategies

With gold and silver continuing their upward trend, some strategies to consider include:

• End of the year bull call spreads on GLD (e.g., 265/270/275 strikes)

• Bear put spreads on silver as a potential hedge against gold positions, and a Harris victory.
• Silver is vulnerable to margin due to large retail participation and lack of central bank demand

• For physical gold holdings, or simple long positions, collar strategies using options can provide downside protection while allowing for some upside participation.
• Call skew means you can fund a 244 Put by selling a 265 call, this protects against a fall greater than 3.5% while giving you 5% upside.

Long-term Outlook Considerations

While short-term volatility is likely, it’s important to maintain perspective on long-term market trends:

• Historical S&P 500 returns have averaged 6-7% annually (10-11% including dividends)
• Some institutions (e.g., Goldman Sachs) are projecting lower future returns (~3% annualized)
• The debate continues on the sustainability of current valuations and growth prospects

Conclusion: Staying Nimble in Uncertain Times

As we navigate this crucial macro week, staying informed and adaptable will be key. While the US election and its potential outcomes dominate the narrative, it’s essential to keep an eye on the broader economic picture, including Fed policy, earnings trends, and global market dynamics.

For investors, this environment calls for a balanced approach:

• Be prepared for heightened volatility around key events, reduce risk now
• Consider implementing hedging strategies if concerned about specific outcomes
• Focus on debit spreads or long options to play the events of next week
• Stay focused on long-term goals while remaining open to short-term opportunities

By understanding the complex interplay of these macro factors and maintaining a flexible strategy, investors can position themselves to weather the storm and potentially capitalize on the opportunities that emerge in its wake.