Our Global Head of Fixed Income and Thematic Research, Michael
Zezas, outlines how investors should navigate the closing days of
the presidential campaign -- including a vote-counting period
that could extend past Election Day.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income and Thematic Research.
Today is going to be a little bit different. We’re exactly six
days away from the US election. The race is neck-and-neck, and I
want to sketch out what investors should expect in the next
couple of weeks.
It’s Wednesday, October 30, at 10 AM in New York.
This is an historic election, and the outcome remains highly
uncertain. What’s more, there’s a good chance we won’t know the
winner on election night due to close vote counts. My colleagues
and I have spent a lot of time on this show trying to give our
listeners a sense of how the election might impact different
economies around the word as well as markets, sectors, and
specific industries. But today I want to take a step back and
highlight a few things that investors should keep in mind right
now.
To sum up what we’ve covered so far: The key policies at stake
are taxes, tariffs, and immigration. Congressional composition
will be critical in determining the extent of tax cut extensions
in either win outcome. Domestic, consumer-oriented sectors are
most exposed to tax changes, while clean-tech is the most exposed
to potential efforts at a repeal of the Inflation Reduction Act.
Macro impacts vary depending on the scope of policies and their
sequencing, but we see downside risks to growth in a Republican
win outcome.
As our listeners know, a candidate needs 270 Electoral College
votes to win. Former President Trump’s most likely path to
victory is through the Sun Belt – Arizona, North Carolina
and Georgia; while Vice President Harris’ most likely path to
victory is through the so-called Blue Wall – Michigan,
Wisconsin and Pennsylvania.
In terms of the Senate, polling and prediction markets have
consistently implied higher likelihood of Republicans winning
control. Democrats are defending more seats in states that Trump
won in 2020, as well as more seats in states Biden won by a small
margin. As far as the House of Representatives, Republicans need
11 of the 25 toss-up seats to maintain control of the House, and
Democrats need 15. The generic ballot is the most reliable House
indicator, in our view. It’s a political poll which asks not
which candidate you plan to vote for to represent you in
Congress, but rather which political party – Democrat,
Republican or Independent – that you would support. The generic
ballot historically correlates with the House winner, and it
currently favors Democrats.
All this leaves us with two key takeaways:
First, don’t expect conclusive results on election night. Early
vote data from key states reflects our view that vote-by-mail
levels are lower than in 2020 but still elevated versus
historical levels. And it may take days to get all the mail-in
votes counted.
Second, full election results may differ from early returns. Why
is that? A candidate may have a deficit in election night vote
counts but still come back to win the race once all ballots are
counted. This depends on two key variables: The share of the
electorate who vote by mail; and the skew among those ballots
toward Democrats – a blue shift – or Republicans – a red
shift.
So again, we need to be patient and wait for the final results.
And when that happens, we will start digging deep into the
post-election outlook for the economy and markets.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague today.
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