A 'Growth Scare' Is Moving Markets Down, Not Political Uncertainty
With Super Tuesday now in the books, Jefferies analyst Sean Darby released a new report assessing the impact that politics has had on the jittery 2016 stock market. According to Darby, the election cycle is not responsible for market fears.
"In our view, investor positioning for a US recession and outright deflation have to be blamed for the equity market declines to date," he explained.
Darby noted that the financial media has been drawing ties between the performance of presidential frontrunners Hillary Clinton and Donald Trump and the performance of equity markets, but Jefferies has witnessed no indication of such fears in the U.S. policy uncertainty index.
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Instead, Darby suggested that the nation is now experiencing a "growth scare," which has been triggered by weak sales numbers. A strong dollar, widening high yield spreads and very mild bank credit tightening has investors feeling "mildly cautious."
In terms of election cycle trading, Darby added that the S&P 500 has historically traded down during the quarter leading up to the election and slightly up between Election Day and the end of the year.
The VIX tends to rise one and three months prior to the election. The dollar tends to gain during those periods as well.
To trade these trends this year, traders could go long the PowerShares DB US Dollar Index Bullish (NYSE: UUP) and the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE: VXX) and short the SPDR S&P 500 ETF Trust (NYSE: SPY) on August 8.
Disclosure: the author holds no position in the stocks mentioned.
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