The US Election – Wall Street's View

Politics is keeping investors awake. It is not difficult to guess that instability in the world's largest economy would bring significant market volatility. As a result, investors retreat by purchasing gold and Treasuries while dumping high-flying stock. The fact that President Trump tested positive for COVID-19 thirty-two days before the election has only added to the uncertainty as this jeopardizes his ability to campaign.

The United States is in the midst of the worst pandemic in a century and the economy is struggling to dig out of the turmoil the virus has caused. The S&P 500 lost 4% in September, marking the benchmark index's worst month since the March lows, with two other major indexes also recording a monthly drop. And yet, Wall Street's is mostly concerned by who will America vote for.

Trump Vs Bidden

Given the position in the polls and the time that remains, Trump's chances of winning are slim whereas Biden has about an 80% chance of winning, according to the FiveThirtyEight election forecast.

Prolonged uncertainty?

83% percent of the portfolio managers surveyed by RBC find that a contested election would be a "negative event" for the stock market. Moreover, only 14% believe the results will be known on November 3.

The possibility of a contested election significantly adds to investor anxiety.

President Donald Trump has explicitly refused to commit to a peaceful transition of power in case he loses.  During the recent debate, Trump baselessly argued that mail-in voting would cause a "fraud like you've never seen", making a case for rigged elections. Greg Valliere, chief US policy strategist at AGF Investments found that these statements make it clear that Trump is willing go all the way to the Supreme Court if he loses. This scenario implies investors need to brace for several weeks of prolonged uncertainty.  Moreover, this delay could also potentially lead to civil unrest as Trump did not make any effort to calm his far-right supporters.

A relatively close election or dragged on results could cause a lot of havoc

Charles Schwab's Randy Frederick told Business Insider that under this scenario, the markets would potentially sell-off and result in severe volatility. The best outcome for markets would be to find out who won as soon as possible. Moreover, a contested result is the widest concern among portfolio managers who were surveyed by RBC Capital Markets, with as many as 76%, citing it as their primary concern. Therefore, contested elections ranked higher than a second wave of layoffs (66%), a slower pace of economic recovery (64%) and even a second wave of COVID-19 (63%). Please note that these surveys took place prior to Tuesday's debate which only amplified election concerns.

Possible remake of 2000

It is impossible to quantify how much would a contested election impact financial markets. But, the current scenario can be compared to that of 2000 when the presidential election results between George Bush and Al Gore were contested. Back then, markets sold off immediately after election day, they leveled off for about a week, and self off for a second time the results were declared on December 12. According to Frederick, history could repeat itself.

What sector is a ‘strong buy' amid this uncertain climate?

Right now, the only sector that Charles Schwab considers as a strong buy are financials due to the fact that it has been a relative underperformer when compared to others. The bank sector 22% this year, a sharp contrast to 25% gain in technology stocks. Moreover, due to outperforms such as Nike, Inc. NKE, Amazon.com, Inc. AMZN and Target, Inc. TGT, even consumer discretionary stocks rose 17%. As a result, the bank sector is trading at more reasonable valuations. At the same time, Frederick expects the bull market will continue with other leading sectors like tech doing fairly well.

What does Wall Street think?

Sophisticated portfolio managers think that Joe Biden will eventually emerge as the winner, although their confidence is slightly weakening, falling from 63% in June to 57% percent, as polled by RBC.

53% of investors think Trump's reelection would be either bullish or very bullish for stocks. The concept is simple as Trump is laser-focused on the stock market and would bring low taxes and light regulation over the next four years.

On the other hand, the former vice president has vowed to raise taxes on corporations and wealthy individuals, along with ambitions plans to invest in clean energy, benefiting the renewables and EVs such as Tesla, Inc. TSLA and many new upcomers. 41% of portfolio managers think Biden would be bearish or very bearish for stocks, which is less than 60% in June so it seems that concerns are fading in Biden's favor. RBC reported that 46% find Biden would be neutral for the market.

Outlook

According to Jeff Buchbinder, an equity strategist for LPL Financial, markets appear to be increasingly pricing Joe Biden in as the favorite but Trump could gain support from a quick recovery. The UK Prime Minister Boris Johnson benefited from this trend as he battled COVID-19.  The bottom line is that Wall Street is more worried about a contested election than a global pandemic that plunged the economy into a recession and froze the world we know as it placed it to a virtual standstill.

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