Market Outlook For The Week Of October 24, 2016

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The financial markets are starting to sniff something big out there, even though traders and investors can’t see it yet.

Right now, the assumption is that Hillary Clinton will win the Presidency and the Senate, but will come 10 seats short of seizing the House of Representatives.

Donald Trump utterly failed to engineer a dramatic comeback at the last debate, digging himself into more and deeper holes instead.

That brings us eight more years of gridlocked government in Washington. But what if that doesn't happen?

What if, instead, Hillary pulls off a "Grand Bargain" with House speaker, Paul Ryan, during her first 100 days in office? Paul Ryan, chastened by a recent thrashing at the polls, might become more amenable and inclined to compromise. A forewarned Clinton, wary of Barrack Obama's example of the past eight years, might be ready to deal as well. At the very least, they should be able to get bills through Congress concerning matters they both agree on.

What would such a grand bargain look like?

Create 30-year tax exempt bonds through which corporations can repatriate their $2.5 trillion in hidden offshore profits. The money would be earmarked only for a national infrastructure revitalization effort. Some 1 million blue-collar jobs would be created, largely in the states with the highest unemployment rates. Since the government would be borrowing at less than the long-term inflation rate, probably at 1.5%-2.0%, it would essentially be getting the infrastructure for free. However, the new taxes generated by the new incomes and efficiencies would be absolutely mammoth.

What would the stock market (NYSEARCA:SPY) do in such a scenario?

It would probably rise 20% by the end of 2017. Bond (NYSEARCA:TLT) prices would collapse, and gold (NYSEARCA:GLD), commodities, energy (NYSEARCA:USO) and the US dollar (NYSEARCA:UUP) would soar. The economic recovery continues for another three years, with US GDP growth recovering 3%. Then all of my "Roaring Twenties" factors kick in.

We can't know for sure how things will play out until after November 8th. That is when both Clinton and Ryan know what they have to work with. Sounds like a win-win-win to me.

Who will be the big beneficiaries? You, me, and risk takers everywhere.

You may want to sit down and smoke a cigarette to digest this one. It is a potential outcome of positively Rooseveltian proportions. With that said, we have an incredibly boring week in store for us next week.

It will confirm my expectation that markets will continue to trade in narrow ranges for the remaining 12 trading days until the presidential election.

However, it should be noted that we are now well into the Q3 earnings period, and most companies are reporting better than expected, especially technology companies and financials. That bodes well for the post election stock market.

Monday, October 24th at 9:45 AM EST, we get the PMI Manufacturing Flash Index. We also get no less than four different Fed speakers that day, so the bond market should be dancing the watusi.

On Tuesday, October 25th at 9:00 AM EST, we get a new monthly update on the S&P 500 Case-Shiller Home Price Index which should confirm continued price increases in the residential real estate market. Remember, supplies are short.

On Wednesday, October 26th at 9.45 AM EST, the PMI Services Flash Index is published. Now that we are short the oil market, we should also pay careful attention to the EIA Petroleum Status Report, due out at 10:30 AM EST.

Thursday, October 27th will be a big data day, with Weekly Jobless Claims and Durable Goods Orders at 8:30 AM EST, and September Pending Home Sales at 10:00 AM EST.

Friday, October 28th at 1:00 PM delivers us only the Baker Hughes Rig Count. Worryingly, the trend has been up for 16 out of the past 17 weeks. This should help cap oil prices for the short term which is what my oil trade is all about.

Good luck and good trading. Keep your hard hat on.

John Thomas
The Mad Hedge Fund Trader

John at Kentucky Derby

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.