Investors watching for market reactions would do well to stick to
their existing plans in an environment where the economic impacts
of any particular US election outcome remains unclear. Our Global
Head of Fixed Income and Thematic Research explains.
----- 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 the US elections and its impacts on
markets.
It's Tuesday, June 18th at 10:30am in New York.
We first started covering the 2024 US election in December of
last year. With about five months to go until the event, it’s a
good time to take stock of what we’ve learned that might be
useful for investors. In short, there’s a lot of noise around
this election, and recognizing that noise is a first step toward
not making mistakes around the event.
First, don’t make the mistake of confidently predicting an
outcome. All indicators suggest it’s very unlikely that we’ll
have a good sense about which candidate will win the election in
the run up to the Election Day, and perhaps even in the days that
follow. Neither candidate has a lead beyond a polling margin of
error in sufficient states to suggest that if the election were
held today that they would win the electoral college.
Prediction markets and polling models also point to a race that’s
a toss-up. It all suggests a tight race going into Election Day.
And with the sustained popularity of voting by mail, vote counts
could move slowly, as they did in 2020; meaning we may have to
dig in for another election week.
Second, don’t make the mistake of making big strategic changes in
your portfolio just because it’s an election year. We recently
studied this and there’s little pattern for how markets behave in
the run up to an election, even when filtering for factors like
similar outcomes and closeness of the race. Markets in the
aggregate don’t seem to consistently price in US election
outcomes ahead of time. There’s more evidence that they price in
expected policy impacts once the outcome is known, which brings
me to my third point.
Don’t make the mistake of overconfidence when it comes to how
post-election policies will impact the economy. Sure, if we
knew one outcome was bad for growth and the other good, it might
be advisable to buy risk assets on the news of the latter outcome
occurring. But especially in this election it’s not that simple.
For example, in scenarios where Republicans win the White House,
you can expect greater tariffs, immigration curbs, and – if they
also control congress – bigger deficits driven by tax cuts
relative to alternative outcomes. According to our economists,
these policies have different effects on growth, inflation and
monetary policy depending on how they are constructed and timed;
and so it defies simple conclusions of growth positive or growth
negative, at least at this point.
So bottom line, don’t mistake noise for signal when it comes to
the election. Stick to the plan, such as the cross-asset
framework recently put forward in our mid-year outlook. And maybe
focus on some equity sectors, such as industrials and defense,
which are well placed currently but have upside in certain
election scenarios.
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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