Was the October Sell-off Position-Trimming Ahead of November Elections?

The price action in the stock market the past two days suggests investors have become more sensitive to the lingering trade dispute between the United States and China. While the price plunge earlier in the week may have been fueled by a Bloomberg report saying the Trump Administration is considering additional tariffs on China, the solid two-day rebound rally may have given investors a taste of what can be expected if the U.S. and China come to some trade agreement.

The tone was already negative in the market when the Bloomberg report hit the internet. This led to an almost immediate sell-off in the market. However, the rally the past two sessions demonstrates what can happen if cooler heads prevail.

Looking back at the price action, I have to conclude that investors may have over-reacted to an event that may or may not take place. Furthermore, there are some who believe the report on new tariffs may not have been news after all. They claim that the Trump administration had already telegraphed additional tariffs months ago, they just left out the start date.

Kudlow Comments

When it comes to White House economic announcements, it’s probably better to ignore the President’s tweets unless you’re a trader who feeds off the volatility that they cause. If you’re an investor then Trump’s top economic advisor Larry Kudlow is probably the best person to follow.

If you’re still searching for reasons for the rally on Wednesday then you should go no further than comments from Kudlow on CNBC. Yesterday, he pushed back slightly on reports that Trump may implement more tariffs on China. The response in the market was pretty evident with investors adding to the positive tone set earlier by strong results from Facebook and General Motors.

Kudlow told CNBC that “Nothing is set in stone right now” ahead of potential talks between Trump and Chinese President Xi Jinping at the G-20 summit next month.

Kudlow went on to say that “policy talks” will determine whether the White House imposes additional duties, “not an arbitrary timeline.”

Stocks received a little boost from these comments in what may have been a small taste of what is to come later when the U.S. and China finally end their trade disputes.

Upcoming Elections

As far as the November 6 mid-term elections are concerned, I have to agree with President Trump. On Wednesday when he said, “I think you’re going to lose a lot of money” if Republicans perform poorly in Tuesday’s elections.

For two years prior to Trump’s election in November 2016, I watched a stagnant stock market and this was when Hillary Clinton was leading in the polls by 8 to 10 points. No one can question what happened in the stock market during the wee hours after the election results were announced. Stocks just took off and haven’t really felt any selling pressure until October 2018.

Some investors want to blame rapidly rising rates, the trade disputes, Brexit and even the budget stalemate in Italy for last month’s steep declines, but I think I can build a case for professional investors trimming positions just in case the Democrats defeat the Republicans.

Trump may be wrong about his prediction that people are going to lose a lot of money. This is because I think these loses have already been baked into the markets. The corollary to this scenario is that we could see another huge rally if the Republicans beat the Democrats at the polls.