With respect to U.S. financial asset prices, is it too early to think about the 2020 Presidential Election? There are 556 days to go; or about 18.5 months. Seems far away, but the potential consequences and ramifications are enormous!
If we take a quick look at the CBOE Volatility Index (chart below), which measures the implied volatility discounted in current S&P Index put & call option prices, traders and investors seem to expect historically low volatility in the overall U.S. stock market immediately ahead. Since January 2018, the range of the VIX has been a low near 9 and a high near 50. The VIX closed at 12.73 this past Friday, April 26. Even though the VIX Index wasn't officially created by the CBOE until the early 1990's, if we went back to the early 1980's and constructed an artificial VIX Index based upon real options prices, we would see a record low near 8 in the summer of 1984 and a record high near 250 in the Crash of October 1987. Given the current potential for chaos in the world right now, option premium levels, as measured by the VIX, seem low to me.
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| CBOE Volatility Index (VIX) Daily Chart with Computer-generated Buy and Sell Signals |
This begs the question: what is the #1 potential catalyst for a meaningful uptick in volatility in U.S. financial asset prices?
In my view, the answer to this question is in the results of the November 2020 U.S. Elections. Will Donald J. Trump be re-elected as President in 2020? While I am not sure that his re-election will be a positive for U.S. stock prices, most Wall Street pundits appear to be thinking this way right now. And even though Mr. Trump's job approval rating right now is historically low at 39%, there are many on Wall Street who actually think he will be re-elected for a second 4-year term.
Here is some "outside the box" thinking that may deserve consideration by traders and investors over the next 18 months:
1. As we get closer to the November 2020 U.S. National Election, President Trump will have some major decisions to make if his polling numbers don't improve from current levels. As "Individual One" in the Michael Cohen felony conviction case involving potentially illegal payments made to Stormy Daniels just days before the November 2016 Election, Mr. Trump risks the possibility of immediate arrest as an "un-indicted co-conspirator" in that case if he loses the election in November 2020. Other criminal charges stemming from the Mueller probe could also be in play here if Mr. Trump is not re-elected in 2020.
2. President Trump's staunch defiance of recent subpoenas issued by several major committees of Congress could result in a move by Democrats in the House of Representatives to impeach the President (impeachment now seems likely to me). Resulting investigations in the impeachment process could weigh heavily on the Trump Administration's ability to conduct the Nation's business and further weigh on Mr. Trump's reputation politically.
3. Most Wall Street pundits currently attach a "zero probability" that any successful impeachment vote in the House will result in a conviction at trial in the Republican-controlled Senate. However, if we look back at the impeachment of President Nixon in 1973 and 1974, this "no conviction" sentiment was similar to now, but Nixon was eventually forced to resign as evidence of criminal wrong-doing began to unfold from damaging televised Congressional hearings from multiple witnesses in a National spectacle. Could Senate Republicans now actually force Trump to resign just like they did to Nixon in 1974?
4. Of course, Trump wouldn't go "quietly" like Nixon did, but facing possible conviction in the Senate and almost no chance at re-election in November 2020, Trump could make a deal with "President Pence" for a full pardon for himself and his family after resigning in the summer of 2020. While a pardon wouldn't stop State governments from moving ahead with possible State criminal investigations, it would eliminate all potential Federal criminal indictments.
5. Without Trump as an opponent, the Democrat candidate for President would surely win the November 2020 election. Even with Trump still in office and still seeking re-election, I think the Democrats will prevail in the 2020 election.
6. If the Democrats win the Presidency in 2020, they are also likely maintain their current majority in the House of Representatives and even win back the majority in the Senate (given the fact that the Republicans now have to defend 22 seats in 2020; Given the current count of 53 Republicans and 47 Democrats (assuming Senator Sanders and Senator King vote with the Dems) the Democrats have to win just 3 seats in November 2020 to regain the "majority", with a Democratic VP as the tiebreaker in a 50-50 Senate tie scenario).
7. If the Democrats win the Presidency in 2020 and also win a majority in the Senate, most of Trump's pro-business "Executive Orders" will be quickly reversed AND, more importantly for equity shareholders, the corporate income tax will be immediately raised from the current 21% rate to at least 30%.
8. After-tax corporate profit margins will evaporate as bottom-line Federal tax rates are increased (by the Democrats) and unit labor costs rise sharply as the National minimum hourly wage rate is doubled to near $15/hour.
9. "Medicare-for-All", or something very close to a single-payer healthcare system would soon become the law of the land when Democrats control the Presidency, the Senate, and the House of Representatives.
10. As the Summer of 2020 approaches, and Trump's re-election becomes seriously in doubt, U.S. stock prices will be decimated, with most major benchmark indices losing 50% or more as fears begin to dominate the investment landscape. Only precious metals investments and related gold/silver mining shares will be immune from the crushing bear market that will unfold in this scenario. While the Federal Reserve will surely attempt a rescue with lower interest rates, quantitative easing, and generally easy monetary policies, their efforts will be frustratingly slow to take hold and to ultimately stem the tide of selling by equity holders.
For now, we only know that all-time record highs were posted in the S&P 500 Index and the Nasdaq Composite Index this past Friday, April 26. Stock market investors seem unconcerned about the potential for carnage ahead. Is there more upside from here, or will stocks roll-over into a meaningful correction anytime soon?
A. Despite record highs in several key benchmark indexes, a weekly chart sell signal was triggered by my computer trading system in the Dow Jones Transportation Index at Friday's close.
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| Dow Jones Transportation Average Weekly Chart with Computer-generated Buy & Sell Signals |
B. Negative technical "non-confirmations" of the record highs posted in the S&P 500 and Nasdaq Comp are currently in place in the Russell 2000 Index and in the key New York Composite Index.
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| NY Composite Index Weekly Chart with Computer-generated Buy and Sell Signals |
C. Negative possible "head and shoulders" top formations are currently forming in the Dow Jones Industrial Average and the Russell 2000 Index.
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| Dow Jones Industrial Average Weekly Chart |
D. Even though a record closing high was posted in the S&P 500 Index this past Friday, the all-time intra-day high in this benchmark Index has yet to be breached which sets up the possibility that we could be witnessing a massive negative "double-top formation" ahead of serious bear market correction.
E. Despite a much stronger than expected U.S. GDP economic report released this past Friday morning (+3.2% annualized growth in Q-1), the U.S. Dollar actually declined in foreign exchange dealings, Treasury bond yields fell, and precious metals prices soared. This price action is completely contrary to what would have been expected given advance knowledge of this exceptionally strong GDP news. Weekly chart buy signals have been triggered in the major Gold and Silver ETFs (symbol GLD & SLV) and also in many gold and silver mining stocks and related precious metals mining ETFs (GDXJ and SIL).
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| Gold ETF Weekly Chart (symbol GLD) with Computer-generated Buy & Sell Signals |
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| Silver ETF (symbol SLV) Weekly Chart with Computer-generated Buy & Sell Signals |
F. Closely watched stocks like Intel (symbol INTC) and 3-M (symbol MMM) suffered historic losses this past week in response to negative earnings reports. While every earnings season we can find stocks that fall precipitously following earnings disappointments, these two companies are key benchmarks in their respective industries and clearly represent a reason for caution by investors immediately ahead in the broader market.
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| Intel Corp Monthly Chart with Computer-generated Buy & Sell Signals |
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| Minnesota Mining & Manufacturing Corp (3-M, MMM) Monthly Chart with Sell Signal |
