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The senate is 'much more important' than who the next president is for the markets: Heritage Capital President

Heritage Capital President Paul Schatz joins the On the Move panel to discuss the latest market action ahead of the first presidential debate.

Video Transcript

JULIE HYMAN: Let's talk about the interplay more now between the markets and the presidency and the election. We have been talking a lot about what will happen in markets as a result of this election, but let's flip that around for a moment and bring in Paul Schatz. He is Heritage Capital president. He's joining us from Connecticut. Paul, it's great to see you.

So as I say, we've talked a lot about of gaming out what happens in markets, but you're also looking at what effect markets have on elections, which, interestingly, this cycle around has gotten a little bit less attention. So if we're looking at the chances of a Trump or Biden presidency, sort of what period of time in the markets is important in terms of informing that, especially now, because voting is going to be much more drawn out this time around?

PAUL SCHATZ: Always good to be with you guys. It's one of my favorite times of the day. So first, regardless of what is hypothesized and opined, elections and the markets really have no interplay until you get about six-- four to six weeks out. Historically-- and I've seen all these studies massage. They just-- they don't bear out with data.

So you have to start looking, we're in that prime zone now. Normally, markets do a good job of predicting who the next president is. They don't do a good job of forecasting the House and the Senate. And I'll say this. It's much more important-- people are going to scratch their head and say I'm crazy-- the Senate is much more important than who the next president is. I think the markets have come to grips.

Look, Wall Street's supporting Biden-- it's got to be a factor of 10 to 1. I mean, you look at his donors, he is lined with Wall Street millionaires and billionaires. Nothing wrong with that. That's just fact. Wall Street doesn't like Trump. That's OK. Right now, Biden has everything to lose. And he is the front runner. He's done it from his cave.

The markets are OK right now with a Biden presidency. I'll say that. If the Senate flips to blue, the markets will not be OK. And it won't be a short-term-- people like to exaggerate. It's a-- market's gonna crash. It's not gonna crash. There'll be a selloff and then a rally, and then bigger problems down the road. But I think you're in that window now to start watching sectors and stocks in a Biden portfolio and a Trump portfolio.

ADAM SHAPIRO: OK, so let let's pick up on what you just said. If Biden wins and if the Senate is blue, because that's the indication for tax policy, do we see a lot of big money selling in order to get the tax gain this year in anticipation of a tax reform of tax reform?

PAUL SCHATZ: Intuitively, Adam, you'd say the answer is definitely yes. I had a conversation this morning with a client talking about just that outcome. The market's pretty smart. We were having this conversation in April all the time about why the market was ripping when corona was getting so bad. The market's an amazing discounting mechanism. The market is already kind of coming to grips with different outcomes, and the market's telling you right now, we're not on board with a blue wave. The market's not accepting that right now.

So if you did have a blue wave-- we'll see as we get close to the election-- I would think there'd be an initial selloff. People will sell because they have received-- they have all these embedded capital gains. And there'll be some kind of decline. We'll make it up, a single to upper single-digit decline. There'll be a rally into 2021, and I think from there, depending on which way Biden goes, you'll see markets either sell off much harder or stabilize. But yeah, people are gonna sell on the election news. And I'll tell you what, I bet an awful lot of money we will not know by the end of that week in November, and possibly not till Thanksgiving or Christmas, who are president, who the Senate's going to be.

DAN ROBERTS: Paul, Dan Roberts here. That's exactly what I want to ask you about. We're discussing what might happen if Trump is elected or what might happen if Biden is elected, but then there's the issue of a contested election, where we don't know for, you know, days, and as you just predicted, maybe even a week. We've been hearing from various people that that is already baked into the market, and that's just kind of hard to believe.

I mean, as you said earlier, you know, we really aren't going to see the election effect until a few days beforehand. I would think, if we have a prolonged period-- a few days or even a whole week, as you're predicting-- where we don't know the winner, I would think that would create a lot of market turmoil. It's hard for me to hear that, oh, that's baked in already.

PAUL SCHATZ: Well, let's look back at 2000, when it was Bush and Gore, and we didn't know. And we were already unraveling through the dot.com bubble, but I-- my estimation is the lack of a winner contributed to somewhere between 5% and 8% of the market downside. So that-- and there's not a lot of history about that. I'm just literally taking a stab in the dark and saying it's going to be somewhat similar.

And the market, I think, will be OK with that. You know, in my mind, I think Trump is ahead on night one and day one, and then his lead slowly erodes. What the market-- what would really throw the market for a curve is that if neither one had enough electoral votes and the election goes to the House and, you know, Nancy Pelosi and her party gets to decide. That's-- I don't think the market would come to grips with that this far in advance, but that is a possible outcome.

Let me say this to individual investors. The worst thing you could possibly do is-- or even institutional investors-- position for an outcome, because you have to get a number of things right. You can't get some right and some wrong. You better get the outcome right, and also you better get how the market's going to respond right, because I was told in 2016, if Trump wins, we're crashing. We crashed for what, six hours overnight, and then the markets took off. So people have to be very careful being that cute around the election with their money.

JULIE HYMAN: Well, but at the same time, Paul, if you're long-term, then you don't have to worry about that stuff anyway. I mean, all of the stuff that happened with Bush/Gore reversed itself, right, once things were settled. So I guess, I mean, do you want to mess with the market timing at all, and just do what you're going to do?

PAUL SCHATZ: So first of all, Julie, your answer, to me, a long-term position is a short-term trade gone wrong, because I don't know anybody-- or I know few people who are really, truly, and super long-term investors. But to your point about Bush/Gore, don't forget, after we knew that Bush won, or the Supreme Court gave it to Bush, however you want to spin it, markets had a brief rally into January of '01, and then they just cut him loose again into March of '01. We rallied again into the summer, and cut him loose through 9/11. But that was an ongoing roughly, you know, two-year bear market.

Could we see something similar? I would subscribe-- that is one of the outcomes that it's on my radar screen right now, and one that I'll write about over the coming weeks and month or so. But so I think people taking a short-term view just of the election, not a good idea. If you want to take that view over the next year or two, then you could position in whatever you wanted into whatever strength comes ahead of us, you want to make, you know, portfolio changes.

JULIE HYMAN: Paul Schatz, Heritage Capital president, we'll have you back on once you write about it, and we will talk about it. Thank you so much.