Investment Discipline In An Election Year

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.