Summary: Markets have moved higher over the past couple of months, with decent economic and inflation news as the tailwinds. But if history is any guide, the few weeks before a U.S. election often see a spike in volatility. With such a close race, this may even magnify any volatility. But then again, this market has easily pushed through lots of obstacles, from a yen carry trade debacle to escalating global conflicts.
For the record, we don’t really like to talk about politics or elections from a portfolio implications perspective for a few reasons. Everyone probably has seen in past elections that polls can be proven wrong; truth be told, people often answer one way and behave in another. The other challenge is who knows if anything said during the campaign actually becomes policy. Then, the biggest variable is how the market will react to election results and/or what is priced. In 2016, when Trump upset the polls to win, markets dropped nearly 10% in overnight trading to open the next morning roughly flat and then move higher in the following days. Add all this up, deviating from your long-term portfolio allocation given a pending election is likely a bad strategy as it's all a bunch of coin flips.
That said, there are some things to at least consider. Obviously, the election outcome on November 5th is close enough to a dead heat. Today, the averaging of national polls has the Democrats with a slight lead and some signs of better momentum. That being said, Predictit, a crowdsourcing/gambling venue, has Republicans winning. The only certainty is that the outcome remains uncertain.
So far, the markets seem to be pretty calm about this election. In years past, campaign comments seemed to result in higher intraday volatility approaching election day, while nobody seems to care what they are saying this year. This may change as we get closer, but certainly rather calm markets. The chart above is the VIX, a measure of options volatility for the U.S. market, in the 20 trading sessions before and after the recent U.S. Presidential elections.
While the equity markets don’t seem to mind the election uncertainty, currency markets are reacting. The volatility in currency options pricing, as has the U.S. dollar, has been rising. Perhaps hedging, perhaps some dollar flows back to America. This has helped feed a stronger USD, which may also reverse after the election.
Based on the polls and probabilities today, there are a couple of the more likely outcomes:
Democrats win with divided government – Divided government is often a positive for markets because it is harder for the government to implement policy changes. And fewer changes mean less uncertainty, which markets like. This could be the best market scenario. There is less risk of tariff escalations, which could damage markets and the economy and put upward pressure on inflation. Plus, increasing spending plans would prove challenging, helping deficit fears and helping put some downward pressure on yields. Still, the tax cuts would likely expire, creating a big economic hit in 2026.
Republican win with sweep – Tax policy gets extended or even more stimulative, which is a positive for the economy. However, deficit risks would be higher and faith in prudent government could waffle, leading to higher bond yields and inflation. The risk of a tariff tantrum 2.0 becomes very real which would add uncertainty.
Of course, there are other scenarios, including indecision 2024. The probability of this becoming a contested election is likely higher than in many years past. Even some of the positioning of comments or challenges as election day approaches sort of appears to be laying the groundwork for a case for contesting the election. This could really lead to uncertainty and potentially negative effects on markets. I believe January 20 is the day a new President must be in place, and there is lots of time between November 5 and January 20.
One saving grace is that maybe everyone expects this to some degree. This is why, in our view, we have seen a move higher in safe-haven assets.
Our Thoughts
Hop on and get ready for a more volatile ride as we move towards election day. We would be very surprised if markets just kept sailing smoothly higher over the next two weeks leading to the vote. Volatility may well persist afterwards, especially if the results are contested. Then, when all the dust has settled, markets will resume trading more on rates, the economy, and, of course, earnings.
— Craig Basinger is the Chief Market Strategist at Purpose Investments
Get the latest market insights to your inbox every week.
Sources: Charts are sourced to Bloomberg L. P.
The content of this document is for informational purposes only and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document, and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable; however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements ("FLS") are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as "may,” "will,” "should,” "could,” "expect,” "anticipate," intend,” "plan,” "believe,” "estimate" or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are, by their nature, based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
The contents of this publication were researched, written and produced by Purpose Investments Inc. and are used by Harness Investment Management for information purposes only. This information cannot be relied on or constructed as advice.
Harness Investment Management is an affiliate of Purpose Investments, an Investment Fund Manager and Portfolio Manager