With less than two weeks to go before the U.S. elections and a second COVID-19 wave underway, there are plenty of headlines. But has the market properly priced in the risks? Kim Parlee speaks with Ben Gossack, portfolio manager, TD Asset Management on how to capitalize on the uncertainties.
- With only two weeks left to go to the election, the polls are running fast and furious. But did you know there's one methodology which has correctly predicted the outcome of the US election since 1928 87% of the time and that is the stock market. Now if we take a look at history, if the stock market goes up for the three months ahead of the US election, what usually happens is the incumbent party wins. However, if the stock market goes down for the three months ahead of the election, we usually see the incumbent party lose.
But what happens this time with the pandemic? Joining me now is Ben Gossack from TD Asset Management with his thoughts and what he is seeing. Ben I want to start with the fact-- we've still got two weeks to go to the election, but right now the market is looking pretty flat.
- Yeah, so obviously we can't use that measure. And we're looking at the same stuff that everyone else is looking at, so polling results, betting, economic data. What's really been interesting to me, so the market likes to use the VIX index to sort of measure the uncertainty. And what we're seeing is that the uncertainty has really come in from where it was even just a few weeks ago. And that's been very telling about what the market thinks will happen with this election.
But you brought in a chart. Let's take a look. This is the VIX Futures term structure. What are you seeing there?
- Right. So term structure-- when we look at the VIX, we're looking at futures contracts. It's the same if you think about a barrel of oil. What would the market pay for a barrel oil three months from now? And so we're looking at what the market is measuring for VIX in the future. The dotted line is where the VIX is today, which is about 27, 28. And that green line just above is what we're pricing out. And you can see there's a bit of a hump around November. That captures the election.
But what's really fascinating to me is that the gray line above is where we were only about a few weeks ago. And this is what I was talking about. The uncertainty has really started to narrow in, and it's driven by a couple of reasons. One is just the polling. The polling has been favoring Biden. When Trump contracted the virus, the market felt that he had lost a lot of momentum in terms of campaigning.
I think the biggest uncertainty has been about mail-in ballots. And there's a very narrow pathway that Trump has to travel to get to an electoral college victory and it goes through Florida and North Carolina. And what's interesting about those states is that they will already start counting those ballots ahead of the November 3 election. So what the market is saying is while it is uncertain who will win, the market is feeling-- or the market is trying to tell us that we think we'll know who the president is before the open on November 4.
- So it's interesting. What the market is seeing there, we don't know what the answer will be on November 4, but what you're saying is what you're seeing at the moment is that there could be an answer on November 4.
- That's correct. And that's pretty interesting given sort of the rhetoric and the headlines that we're seeing in terms of what's coming at us. The market seems to be showing something entirely different.
- Now tell me, this is interesting, but when you take a look at how this factors in the market, one of the things that you manage as an ETF, TGED, how do you use that knowledge with helping you with TGED?
- So elections are always very interesting. But when we invest money in our funds and our strategy, especially in the ETF, we're investing for the long term. We care about long-term secular trends. So the cloud has been around since 2006. That's three different presidents. But what's really exciting about TD Active Global Enhanced Dividend, while the core might be long term, we use a lot of options to generate income. And those are very short term in nature.
So we can take advantage of the uncertainty regarding an election and use that to draw and increase the income that we're trying to deliver on our mandate. I did bring an example of Apple, which I thought was actually quite interesting.
- All right, we'll go ahead. You brought in the chart, so tell us a bit more about this example you have with Apple.
- So what you're seeing in this Apple chart is we're looking at what investors are paying to hedge their exposure-- that's the red line-- and what they're willing to pay to get leverage to Apple, Apple being the biggest stock in the market, one of our big holdings. And you can see it's had quite a year. So with the virus outbreak, there was a spike. We did have a shift into tech in the summer.
But what I found very interesting is that both lines have been trending a lot higher going into the election. And this captures the election as well. And I think there's a couple of reasons for that. One, we're getting into earnings season. Two, Apple just discussed and is launching their new phone. So we have a phone cycle. But what's really interesting about this election and what could be the Biden administration is that the House released an antitrust report. And there looks to be more regulation regarding the big tech companies. This would include Apple. And so that's also starting to price into that uncertainty.
All in all, since we own Apple, we're able to take advantage of the fear regarding the regulations but then also take advantage of the optimism around this new iPhone with the 5G capability.
- Ben, thanks very much. Great to hear from you.
- Thanks, Kim.