US election fireworks not over yet, but the wild ride will end

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Ultimately, investors should remain focused on fundamentals and fully invested during the election.

The most contentious Presidential election in US history?

“Polls continue to signal a decisive victory for Joe Biden, with some models predicting a double-digit percentage Biden popular vote more than twice as likely as President Trump being re-elected. This is good news for investors, not because markets like one candidate better than the other, but because markets hate uncertainty and when polls narrow, there is less confidence in the eventual election result.”

“Analysis suggests there is no statistically significant correlation between the political party in office and equity market performance – elections don’t stop prevailing economic conditions from driving markets. At the same time, the outcome of the Congressional elections, in particular the Senate will arguably matter more than who sits in the Oval office because policy changes do have lasting impacts on the economy.”

Don’t let political beliefs cloud long-term investment plans

“We know from experience that polls do not have a perfect predictive track record, but neither do market expectations. The overwhelming belief in 2016 was that a Trump victory would be negative for risk assets, yet until the pandemic Trump had presided over one of the best market performances in decades.”

“Investors should remember that the fireworks and noise surrounding the election will subside, and markets will reassert a trajectory determined by fundamentals rather than election news flow.”

“In our view, reducing long-term investment allocations because of a political view means taking a stance against the ability of the US economy to grow, and believe that an active, long-term approach remains best, even for investors worried about the election.”

What effect will the policy leanings and decisions of the new President have on markets?

“Being tough on China remains one area of bipartisan support – and a key policy focus point for both sides. Trump would inevitably remain tough on China. A Biden administration, on the other hand, might return to a more predictable foreign policy stance – but would likely take a hard stance nonetheless. It is therefore likely that the relationship between the two super powers will remain confrontational. The full market impact of this tension is difficult to quantify.”

“Big Tech has been a focal point for the U.S. Government for some time, resulting in multiple federal, state and congressional antitrust investigations which have been ramped up in recent weeks. We expect the assault on Big Tech to continue regardless of who wins, but at the same time believe that action in the form of legislation is likely to be a process measured in years rather than months.”

“Markets have become increasingly preoccupied by the outlook for additional fiscal stimulus – an area where the two candidates differ significantly. A Democratic sweep would likely result in a positive fiscal stimulus package in coming years, whereas a second Trump administration would not see major changes in tax or spending policies, in other words, reduced fiscal stimulus.”

Implications for investors

“A widening of the gap between the two candidates is positive for markets because it means a prolonged spell of political uncertainty is less likely. At the same time, pre-election polls are by no means perfect predictors of outcome so adjusting portfolio allocations to position for the candidate most likely to win is a dangerous strategy.”

“Regardless of the outcome of the election, markets will remain buoyed by easy financial conditions, accommodative monetary policy and ample liquidity, factors which have already driven them to record highs despite the disastrous effects of the pandemic.”

“Ultimately, investors should remain focused on fundamentals and fully invested during the election. The priority should be diversification and active positioning for a slow and protracted economic recovery backed by central bank liquidity.”

By Seema Shah, Chief Strategist

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