With no clear US election outcome as of the time of writing, wealth managers adopted a cautious stance around market exposures, expecting further volatility until the outcome is known.
US stocks rose sharply yesterday, and US equity futures rose about 1 per cent today, the US election counts that so far suggested that even if Democrat Joe Biden edges over the line against President Donald Trump, the Republicans will retain the Senate and hence prevent drastic policy changes and a sharp move to the political Left.
As of the time of writing, US stock futures such as those linked to the S&P 500 and tech-heavy Nasdaq rose, after having been volatile earlier in the day, after Trump claimed that he had won the US election even though several states’ results, such as Pennsylvania, had yet to be decided. His comments - and the risk of lawsuits in contested cases - stirred worries about a legal battle to decide the election, with echoes of the 2000 race between George W Bush and Al Gore.
Millions of votes mailed in this year remain to be counted, a consequence of the pandemic’s impact on electoral logistics as well as greater use of postal voting. Biden had, as of this morning, won Wisconsin and Michigan - two vital states in securing Electoral College votes. Biden now has 264 EC votes to Trump's 214.
If a change of administration does take place, it could affect sectors such as energy and healthcare, while also leading at some point to tax hikes on high earners, although details of what a potential Biden administration would do have been sketchy at times. As many commentators said, much of this election appeared to revolve around a referendum on Trump’s first term as much as on the specifics of his opponent’s programme.
“While this isn’t ideal, it’s not unprecedented,” says Columbia Threadneedle chief investment officer, Colin Moore. “It is not unusual to not have all votes counted on election eve, but this year is especially challenging because of the large number of mail-in and absentee ballots. The difference in voting preference between mail-in/absentee (leaning Democrat) and in-person (leaning Republican) is quite dramatic and complicates predicting the outcome in a few states regardless of current tallies.”
“So, in the short term we need to be patient while the counting process continues. However, if we end in a stalemate, we have constitutional backstops that address inconclusive results.” Indeed, Federal law requires that we have a president on Inauguration Day, which should give investors some degree of comfort in what is likely to be a volatile period,” Moore said.
“We maintain a positive view on stocks over the medium term, driven by expectations for another round of fiscal stimulus and the widespread availability of a vaccine by the middle of next year. We believe the recovery from the pandemic will continue to be the main equity market driver over the next several months, regardless of the election outcome,” UBS said.
The Swiss bank said that measures such as the VIX Index of US equity options prices – sometimes dubbed the “Fear Index” – implied daily market swings of 2 per cent for the next few days. However, investors should not park funds in cash, UBS said. Also, investors should position for some depreciation in the dollar over the medium term, because the sheer scale of US debt will be a concern, and the US has also lost its interest rate edge over other major currencies. Precious metals such as gold could appreciate.
LGIM’s chief investment officer, Sonja Laud, said that a period of political gridlock if there is not a clear result for days, or even weeks, will force investors to hold “safe-haven” assets such as US Treasury bonds. This could also boost the dollar, she said. Uncertainties will weigh on US equities.
Adrien Pichoud, chief economist and senior portfolio manager at SYZ Private Banking, said of the outcome: “The period of uncertainty ahead of us has the potential to unsettle financial markets, especially as the COVID-19 pandemic is again forcing many countries to resume social distancing and disrupt economies. If Trump were eventually confirmed for another four-year term and re-elected with a split Congress, we may see equity markets resume the positive trend, but we think this is unlikely, as long as uncertainties and the possibility of social unrest remains.”
"As we have already reduced our market exposure in client portfolios over the past two months, we are not in a rush to cut exposure further. Although the US dollar could strengthen during the period of political uncertainty, we expect to see range-bound long-term dollar interest rates, as the structural trends of slow growth and inflation remain in place, along with very accommodative monetary policy from the Federal Reserve,” Pichoud said.
“We have a number of positions in place to contain the impact of any significant short-term equity market volatility, as well as defensive assets, such as high-quality bonds and gold. Volatility will also provide opportunities to add exposure, as this low interest rate environment is here to stay and will ultimately support higher yielding assets,” he added.
Stéphane Monier, CIO at Lombard Odier, said: “It’s far too close to call, but right now it is clear that the Democrat landslide suggested by polling is just not materialising. For now, it very much looks that whoever wins the White House, we face a divided Congress. This has far-reaching implications for markets, mostly because it means that any kind of pandemic recovery package is still tough to approve. Our portfolios are well balanced to withstand the volatility ahead, and in the very short term we are going to keep some powder dry and reduce our exposure to high-yield credit so that we have a little more cash to deploy once this election is settled.”