The herd psychology isn’t just visible at the level of individual stocks. If we look at funds’ sectoral holdings, the same pattern appears. The sectors in which funds were overweight at the beginning of the year are now even more overweight, and vice versa. There has been very little rotating from successful sectors, or profit-taking thus far:

This is good evidence that a correction was needed, and that it might have further to go. For the longer term, the issue of how fund managers are paid and incentivized looks to be a critical one if markets are to avoid a cycle of bubble and bust.

RBG
This year’s electoral “October Surprise” came in September, with the death of Supreme Court Justice Ruth Bader Ginsburg arriving by tragic coincidence just as the Jewish holiday of Rosh Hashanah began. Ginsburg was arguably the best-known member of the Supreme Court in generations, and a figure who came to take on immense cultural significance. There have been some superb appreciations of her life in the last 48 hours, and you can find them here.

For now, the crude but necessary question is: How exactly is her passing likely to affect markets? We should split the question into two. First, does it change the odds on the likely winner of the presidency, or the Senate? Second, does it increase the chance of the “nightmare scenario,” of significant civil disorder or a constitutional crisis?

My guess is that the answer to the first question is “no.” Normally, conservative voters are more invigorated by a court vacancy than liberals are. But RBG’s sainted status among many on the left could change that. S&P 500 futures opened in Asia with little change, while betting and prediction markets have shown minimal shifts since the news broke. 

The answer to the second question, however, has to be “yes.” The Supreme Court rules on issues that matter passionately to many Americans, such as abortion and gun rights. A fight for a seat that could change the court’s balance will raise the temperature. Add to this the deep ill feeling created by the process, and there is every chance of mass demonstrations and civil disobedience before the election. 

Beyond the chance of disorder, the risk of a constitutional crisis is deepening. Democrats are incensed that Republicans refused to let Barack Obama’s nominee Merrick Garland have a vote in similar circumstances four years ago, but seem intent on pressing ahead now. Much will depend on whether they can successfully label the Republicans as hypocrites. 

The problem is that having done this, the Democrats will have reduced the perceived legitimacy of the court. And their only weapons for stopping a new justice being appointed before the next presidential term starts are extreme. Should they win the presidency and Senate, they can plausibly threaten to expand the court. This would recreate a liberal majority and do grave damage to the court as an institution. Democrats can also threaten to deal with the inherent pro-Republican bias in the Senate and the electoral college by pressing ahead with attempts to make Puerto Rico and the District of Columbia into states.