Despite a flurry of election news, little may have changed for
investors weighing the possible outcomes. Our Head of Fixed
Income and Thematic Research, Michael Zezas, explains why this is
the case as we move closer to Election Day.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan
Stanley's Global Head of Fixed Income and Thematic Research.
Along with my colleagues bringing you a variety of perspectives,
today I'll be talking about recent developments in the US
election.
It's Wednesday, September 4th at 10:30am in New York.
While news headlines might make it seem a lot has changed in
recent weeks around the US election, in our view not much has
changed at all. And that’s important for investors to understand
as they navigate markets between now and Election Day on November
5th. Let me explain.
In recent weeks, we've had the Democratic convention, fresh
polls, and a third party candidate withdraw from the race and
endorse former President Trump. But all appear to reflect
only marginal impacts on the probabilities of different electoral
outcomes.
Take the withdrawal of independent candidate Robert F Kennedy
Junior, which does not appear to be a game changer. Historical
precedent is that third party candidates rarely have a path to
even winning one state's electoral votes. Further, in polls
voters tend to overstate their willingness to support third
parties ahead of election day. And it's also not clear that
Kennedy withdrawing clearly benefits Democrats or
Republicans.
Kennedy originally ran for President as a Democrat, and so was
thought to be pulling from likely Democratic voters. However,
polls suggest his supporter’s next most likely choice was nearly
split between Trump and Harris.
So while it’s possible that Kennedy’s decision to endorse Trump
upon dropping out could be meaningful, given how close the race
is, we’re unlikely to be able to observe that potentially
marginal but meaningful effect until after the election has
passed. And such effects could easily be offset by small shifts
favoring Democrats, who are showing some polling resiliency in
states where just a couple months ago the election was not
assumed by experts to be close.
For example, Cook Political Report, a site providing non-partisan
election analysis, shifted its assessment of the
Presidential election outcome in North Carolina from “lean
Republican” to a “toss-up.” Similarly, in recent weeks the site
has shifted states like Arizona, Nevada, and Georgia into that
same category from “lean Republican.” These shifts are mirrored
in several other polls released last week showing a close race in
the battleground states.
So, for all the changes and developments in the last week, we
think we’re left with a Presidential race that’s difficult to
view as anything other than a tossup. To borrow a term from
the world of sport – it’s a game of inches. Small
improvements for either side can be decisive, but as observers we
may not be able to see them ahead of time.
And so that brings us back to our guidance for investors
navigating the run up to the election. Let the democratic process
unfold and don’t make any major portfolio shifts until more is
known about the outcome. That means the economic cycle will
drive markets more than the election cycle in the next couple
months.
In our view, that favors bonds over stocks. Lower inflation
enables easier monetary policy and lower interest rates, good for
bond prices; but growth concerns should weigh on
equities.
Thanks for listening. If you enjoy the podcast, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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