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Sweet Gridlock

Written by Briton Ryle
Posted December 16, 2020

January 5, 2021. That’s the day that Georgia voters will decide the makeup of the Senate, whether the wingnut faction of the Democratic party gets a role in the agenda for the next four years, and it may well determine the direction of stock prices for a couple of months…

Yep, a lot is at stake. 

Before I go on, I want to make something clear about wingnuts: Both parties have them. For the Dems, the wingnuts want to break up banks and Big Tech companies and immediately switch to renewables. For the GOP, the wingnuts refuse to spend a penny on any program that would help “we the people” and would deregulate to the point that we have robber barons again. 

Neither is good. 

But I will say: Some tech companies would benefit from a break-up. Imagine if you had Facebook, Instagram, and WhatsApp as individual stocks. All three are powerhouses — the words “unlocking value” come to mind. 

But break up the banks? Very very bad idea. Might as well just let China have it all.

The transition to renewables is happening, like it or not. Investors want it, companies want it, citizens want it. There is momentum. 

As for the spending thing, what, we can give corporations — which are absolutely not people, despite what the Supreme Court said — huge tax breaks but refuse to throw any more than a few dollars at actual people? 

And why not have the “public option” to shuffle health insurance papers around. Could that be any worse than what the private insurers do? Rates rise 20% a year, every year.

Anyway... nobody pays me for riveting political commentary, especially in a free e-letter. So I’ll stick to my beat: stocks and markets. 

Beautiful Gridlock

It’s been noted ad nauseam that the stock market likes it when the Senate is controlled by one party and the White House by the other. Because in that scenario, everything requires compromise, which usually means not much gets done.

Right now, we have gridlock. That’s a big reason stocks have been doing so well. But there is a chance that this sweet stasis will go away in a couple of weeks. 

Two Senate seats are at stake in Georgia, and the GOP has a two-seat majority in the Senate. Win just one of the two contested spots, and gridlock remains. But if the Dems happen to take both, then the Senate will be split 50-50, and the vice president will cast the tie-breaking vote.

Frankly, I don’t expect a whole lot of upside for stocks before that vote, even if a stimulus bill gets passed. And while it would seem that the Dems taking those two Senate seats is unlikely, stocks would certainly head lower if the unlikely happened. 

Because Democrat control of the Senate would put that party’s wingnut faction in play. 

Yes, Biden is no wingnut. He is a moderate and isn’t going to go wingnut. Just look at his cabinet picks so far: no wingnuts.

And that’s a good thing.

How Much Downside

So stocks are definitely, unequivocally, without a doubt trading at nosebleed levels. “Overbought” is the technical term. I learned a new phrase from Bloomberg last week: TINA. 

Big investors are buying stocks because TINA — there is no alternative. 

Can’t buy bonds, can’t hold cash, gotta buy stocks to get any kind of return.

And every single fund manager out there will tell you that fundamentals are out of whack, but there is no downside because of the Fed. 

This is a bit scary. Everyone’s leveraged, ETFs are flying, and if this thing tips, look out below. 

The day before the election, November 2, the S&P 500 closed at 3,310. That’s roughly 10% lower and would be the target of any correction worth its salt. 

The odds of a 10% drop are maybe 50/50 right now, but if the Dems take the Senate, it’s a lock. 

If you’re looking to buy stocks, you can wait a bit. It seems inevitable to me that lower prices — be they a little or a lot — are coming over the next couple of weeks. 

Bide your time. Patience is a virtue right now.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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