The US goes into midterm elections tomorrow and the current administration is expected to lose ground to a “Red Wave”, i.e. the conservative Republican Party (or the “Red” party) is being widely touted to gain control of both houses of parliament. This creates a “gridlock” situation wherein the ruling administration controls the President’s chair while both houses of parliament will be aligned against them, thus leaving any new policy-building potentially in tatters.
As the electioneering for the midterms commenced earlier this year, the ruling administration leaned heavily into social issues such as abortion (which the U.S. Supreme Court effectively abrogated from being a national mandate to a matter that should be determined at the state level) and debate on transgender rights. In surveys conducted by the venerable non-partisan Pew Research Center in May, it was determined that neither of these issues were in Top 10 issues considered to be of concern by the average American voter. The top three issues were, of course, inflation, the high cost of healthcare and violence that had been rippling through many major American cities for almost two years.
By August, perhaps on account of the strident coverage churned since the Supreme Court decision, abortion emerged as No. 8 in another survey carried out by the same institution. The top 4 issues continued to same 3 issues as in May, with gun policy added as increasing number of Americans armed themselves in light of rising crime and lenient laws towards criminals being afforded by prosecutors generally aligned with the current administration.
The opposition had remained consistent in their core issues throughout this time: echoes of “It’s the economy, stupid” – a phrase coined by James Carville, a strategist for the current administration’s party during their successful bid to unseat George Bush from the presidency in 1992 – seemingly buoyed the opposition’s candidates in the lead-up to the midterm elections.
The Republicans’ focus on the economy isn’t exactly misplaced. Earlier this month, more than a third of small businesses surveyed randomly stated that they’re unable to pay October’s rent. This number has been steadily ramping throughout the year with “Blue” states (i.e. states controlled by the current administration’s party) holding all of the Top 5 positions where business owners reported this at levels well above the national average.
As per the the U.S. Small Business Administration Office of Advocacy, small businesses are a key part of the U.S. economy and account for a little under half of all private workers in the U.S.. The National Federation of Independent Business (NFIB), another long-standing advocacy group for small businesses reported that its Small Business Optimism Index – which has been calculated since 1986 – inched up 0.3 points in September to 92.1, making it the ninth straight month below the 48-year average of 98. While small business respondents were generally stating optimism in continuing their business, nearly 30% of owners indicated inflation was a critical problem for their business.
On an “average citizen” basis, personal savings in the U.S. is estimated to be at historical bottoms, with credit card debt soaring to highs:
Cross-sectional analysis made on different data sources by Harvard Professor Jason Furman indicate that nearly half of net savings accrued via pandemic-era financial relief measures have been spent in the past 12 months at a steadily increasing rate. As inflation continues to weigh large, the balance can be estimated to burn off even sooner:
On the topic of credit cards, many major credit card issuers who issue monthly report broadly report that delinquency rates continued to slowly climb toward pre-pandemic levels in September. Although some issuers also report that charge-off rates are falling, October levels can be expected to not be any better when the data is made available.
Mr. Michael Cembalest, Chairman of Market and Investment Strategy at JP Morgan, made a rather interesting observation from data of recessions in the past: equities tend to bottom several months (at least) before the rest of the victims of a recession.
Furthermore, economic indicators in the present day that have a strong relation to market momentum, show a near-unshakeable “downbeat” trend:
Let’s juxtapose this with data from Bank of America near the end of last month. As governments around the world leaned into debt issuances since the end of the Cold War, negatively-yielding debt has seen a precipitous fall in issuances and nearing 10-year lows. This is largely due to waning demand for bonds among investors (which was reported in an earlier article):
This did not translate to, for instance, increasing flows into equity markets. As of last month, the US 2-Year Treasury Bonds yielded more than $S&P 500 dividends:
Now, despite bonds being so unattractive to investors in general, BofA’s private clients have shown a 10-year high in inflows to bonds. The bank’s private investors have historically shown a heavy tendency to own stocks.
This outflow from stocks is not just limited to high net-worth investors. Given the historical falls, it is logical that individual investors would do so as well. According to an October survey by the American Association of Individual Investors which was released at the start of this month, individual investors increased the share of cash in their portfolios to around 25%, the highest level since March 2020, which is when the stock market crashed.
Robinhood, the leading commission-free brokerage app used by small-value individual investors, reported in the latest quarterly update that Monthly Active Users (MAU) are at lows not seen since Q4 2020:
By no means is inflation worries limited to the U.S. Fidelity estimated that, as per end of September data, inflation in the Eurozone will overtake that of the U.S. in 2023, with the United Kingdom already doing so.
Overall, as it turns out, holding cash was comparatively a better choice than holding any instrument: be it leading global stocks, corporate bonds, gold, the S&P 500 or even U.S. Treasury Bonds of any tenor:
However, it is incomplete to say that most investors are cashing out altogether. As an earlier article on Amazon indicated, there have been strong inflows into holding ETFs by investors who have to maintain coverage over equities. It can be estimated that this had some effect on the slight spike seen earlier this month in the S&P 500’s forward equity valuations:
This inflow, rather than strengthening conviction in any single stock or sector or an expectation in economic downturns ending, is likely to be a prime factor in the slight rises seen in markets in recent times. As Mr. Cembalest stated, the current economic scenario may not be the worst yet.
This is also where the Republican contentions that the economic downturn is solely the current administration’s fault. Markets were deemed overvalued by leading fund managers in survey after survey since 2019 and inflation had been creeping throughout previous administration’s tenure as well. While a number of policies by the current administration can arguably have exacerbated the situation to present-day lows and woes, the simple fact is that the US economy has been a ticking time bomb for quite some time now. Only recently has the ticking gotten louder and faster.
Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500 as well as the upside or the downside to the Nasdaq-100.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
Terms and Conditions
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.