Treasuries sold off even as the ISM data fell short of expectations. The sell off was blamed on the Supreme Court ruling that President Trump has some immunity from criminal charges for trying to reverse the 2020 election results, all but ensuring that a trail will not happen before the November election.
The market is interpreting a Trump election would increase the likelihood of continued tax cuts that may increase the deficit.
As noted several times, regardless who wins, the deficit will need to be reckoned with. President Biden is advocating continued spending and the expiry of some of the tax cuts enacted in 2017 and raising the maximum tax on capital gains and dividends to 45% as well as taxing unrealized capital gains and the reduction of the death tax from $10 million to $1 million.
There is a time-tested axiom that the best way to get less of something is to tax it or increase its price.
According to the CBO, Federal revenues are at an absolute and percentage record of GDP. Spending is expected to hit 24.2% of GDP this year and average 24% over the next decade.
For perspective, consider that spending before the pandemic exceeded 24% only once since WWII—in 2009 amid the financial panic and the stimulus binge of that era according to the CBO.
The oxymoronic aspect of the above explanation for the bond market sell off is that during last week’s debate, neither candidate proposed policies that would reduce the fiscal deficit which according to most including the Federal Reserve is growing at an unsustainable pace.
Perhaps a larger question is whether the bond market is now waking up to the election.
Led by the mega caps, equities advanced sending the NASDAQ up 0.80%. The Dow was flat. The unbalancedness of the market is widely documented. There are three companies with a market cap of more than $ 3trillion (MSFT, AAPL and NVDA).
There are two companies with a market cap above $2 trillion (GOOG and AMZN) and one company with a market cap above $1 trillion (META).
According to the Bahnsen Group, after becoming one the ten largest companies in the S & P 500 index, the average annual underperformance relative to the market was a negative 1.5% for the next ten years. This study goes back one hundred years.
There are 406 companies in the S & P 500 with a market cap below $100 billion or about the same amount that NVDA or MSFT could move in one day.
Last night the foreign markets were mixed. London was down 0.34%, Paris down 0.83% and Frankfurt down 1.01%. China was up 0.08%, Japan up 1.12% and Hang Seng up 0.29%.
Dow and NASDAQ futures are down 0.25% and 0.50%, respectively ahead of the JOLTS Jobs Openings data and remarks from FRB Chair Powell. The 10-year is up 3/32 to yield 4.45%.
