Revisiting Gore/Bush in 2000 … will tomorrow be Gore/Bush “on steroids”? … the Fed’s November FOMC meeting is Thursday … the case for no cuts this time

An utter mess.

That’s really the only way to put it.

On November 8, 2000, George Bush led Al Gore in Florida’s presidential election vote count by about 1,700 votes.

The national race was so close that the winner of Florida, with its 25 electoral votes, would become president.

With a differential of less than 0.5%, the Florida vote tally was so close that state laws triggered an automatic recount. Bush had a victory margin of just 317 votes.

Gore asked for a manual recount, and about two weeks later, Florida Secretary of State Katherine Harris certified a Bush victory. Gore sued, claiming all the recounts had not been completed at the time of Harris’s certification.

Fast forward another week, and on December 8, 2000, the Florida Supreme Court sided with Gore. You’ll likely recall the drama surrounding the “hanging chad” problem.

Bush then appealed to the Supreme Court. I won’t get into the mind-numbing legalese of its unsigned per curium main decision, but the takeaway was that, finally, on December 12, 2000 – more than one month after the vote – Bush won the presidential election.

And how did the stock market handle that month of uncertainty?

The Dow fell 5.3% and the S&P dropped 8.2%.

With that context, let’s jump to financial economist David Rosenberg from last week:

This will be the mother of all contested elections, replete with recounts and legal challenges.

It will be Gore vs Bush in November 2000 on steroids.

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While we hope Rosenberg is wrong, legendary investor Louis Navellier suggests investors should be prepared for such an outcome

Here’s Louis from last week:

It doesn’t matter who you’re voting for. On Wednesday, November 6, unprecedented social strife could be unleashed as both sides contest the election.

This could be the most bitterly fought post-election battle in modern U.S. history – worse than Gore v. Bush in 2000 and Trump v. Biden in 2020.

It could also set off a chain reaction on Wall Street – including a bout of massive stock market volatility.

Keep in mind, there’s another source of potential volatility coming next week – the Fed’s November meeting.

While overshadowed by the election tomorrow, the Fed meets Wednesday and Thursday to decide its next move with interest rates. As I write Monday morning, traders put 99.8% odds on the Fed cutting rates by another 25 basis points.

The danger is that with this degree of certainty, if the Fed doesn’t follow through on a cut, Wall Street could see a tantrum-based selloff. And if tensions are already high due to the election outcome, that could be like dumping gasoline on a fire.

Here’s Louis’ take on the combination of the Fed decision and the election:

Right now, markets are expecting a quarter-point cut to follow the half-point cut we got in September. But it could be another half-point cut. Or the Fed could decide to leave rates where they are.

In normal times, Fed decisions are big market drivers. But this is coming right after perhaps the most contentious presidential election in modern history.

That could lead to even more severe stock market volatility as these two shocks hit our political and financial systems at once. Stocks could whipsaw violently as investors try to cope with all the uncertainty.

In a moment, we’ll circle back to how Louis is preparing for such volatility risk. First, let’s continue with the Fed and its rate policy decision next week.

The Fed should not cut rates

To set the stage for why, let’s circle back to Federal Reserve Chairman Jerome Powell’s FOMC speech in September:

As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished, and the downside risks to employment have increased.

Now, you’ll recall that, for months, the Fed echoed a refrain when asked about its interest rate policy: It would be “data dependent.”

So, based on the data, how have these risks changed in recent months?

First, on the employment front, here’s the unemployment rate beginning in July:

July: 4.3%

August: 4.2%

September: 4.1%

October: 4.1%

Now, we could nitpick the details, but we can at least conclude that the unemployment rate isn’t soaring out of control. Instead, it appears to be on a downward trajectory.

And what about inflation?

Well, let’s evaluate the Fed’s favorite inflation gauge: the core personal consumption expenditures (PCE) price index. Here’s the month-over-month data for the last four readings:

May: 0.1%

June: 0.2%

July: 0.2%

August: 0.2%

September: 0.3%.

Again, we could nitpick about the details, but at a minimum, we can conclude that inflation isn’t consistently falling. Instead, it appears to be on an upward trajectory.

As you look at these trends, what’s the greater danger? Labor market weakness or a resurgence of inflation?

To me, it looks like reinflation.

Maybe I’m wrong, but based on these data sets, might it be wise to wait just one more month to see how the numbers come in before cutting again?

Might it be wise to avoid a move that potentially juices an economy that needs no juice?

Last week, we cited analysis from Louis’ favorite economist, Ed Yardeni. He believes the Fed has miscalculated today’s neutral rate and is at risk of overstimulating the economy by over-cutting:

Our conclusion is that if the Fed continues to lower the federal funds rate, monetary policy will most likely stimulate an economy that doesn’t need to be stimulated.

The result could be rebounds in both price and asset inflation rates. The latter is certainly underway in the stock market.

So, what’s the case for the Fed holding rates steady later this week?

Well, here’s Bloomberg:

The chances that Federal Reserve officials will leave interest rates unchanged in November are mounting as the US economy powers ahead, according to Torsten Slok, chief economist at Apollo Management.

There are plenty of reasons for the robust US economy, in Slok’s view. A dovish Fed, elevated share and home prices, narrow credit spreads, as well as “wide open” corporate financing in both the public and private markets are just some of them.

And yet, traders are basically at 100% certainty of another cut. This is a recipe for volatility if the Fed disappoints.

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With this in mind, how is Louis playing the risk of election/Fed volatility?

Last week, he answered that question alongside Charles Sizemore, the Chief Investment Officer at our corporate partner, The Freeport Society.

They detailed why election uncertainty could drag on for weeks, like Bush/Gore in 2000… why that could send market prices on a rollercoaster ride… and a specific trading strategy you can use to transform volatility into profits.

Louis even gave away a free trade, noting “I believe it will pay off no matter who’s eventually declared the winner.”

To catch a replay of the free event, just click here.

Stepping back, here we go…

We’re about to see what happens when we combine one of the most bitter presidential elections in history, and a Federal Reserve decision that could upend near-certain Wall Street expectations.

Hang onto your hats.

Have a good evening,

Jeff Remsburg

WEEKLY ROUNDUP

This Bias Could Be Affecting Your Portfolio

Hello, Reader.

Imagine watching NBA basketball, and LeBron James is having a terrific game.

He’s just made six shots in a row. The game is close. And James is lining up to take another jump shot.

What are the odds that he is going to make it?

In basketball, players and coaches will often talk about the “hot hand.” This refers to the phenomenon that someone who has made several baskets in a row has a greater chance of making the next one.

But that’s a fallacy. The odds that James will make his next shot remains the same, regardless of how many baskets he has made previously.

The belief in the “hot hand” is a well-studied example of “recency bias.”

If you’re unfamiliar with this term, you will certainly understand it if you’ve ever had an annual performance review at your job. Odds are that your supervisor remembers a lot of what you’ve done in the last month… but can’t remember work completed nine months ago. As a result, you’re more likely to be judged more for the last month rather than the last year.

This same bias could be affecting your portfolio, too.

In investing, “recency bias” occurs when a stock has momentum, either up or down. If a stock has been going up for the last six months, folks naturally believe it is likely to keep going up.

The inverse also happens: If a stock hasn’t gone up in six months, it seems likely it will not go up any time soon.

On a wider level, if it has been 10 years since the last bear market, investors are more likely to believe one is not coming soon.

However, you don’t need to rely on momentum to know which stocks to buy or sell. And you don’t have to let your future be governed by recency bias. All you need is the right tools.

That is why my InvestorPlace colleague Louis Navellier revealed his powerful quantitative tool at his “Day-After Summit” last week.

The trades that the system has flagged have beaten the S&P 500 by 6-to-1 in back-tests going back to 1990. And of the 19 open trades in the core portfolio where this system is now in use, 18 are winners.

Folks who take advantage of this system will have the chance to get ahead of unpredictable market moves during political, economic, and financial shocks… like tomorrow’s presidential election is expected to bring. It will also give you the shot at rare short-term gains.

To learn more about this tool – and what to expect in the days after tomorrow’s election – click here.

Now, let’s look at what we covered here at Smart Money this past week…