With a victory for either side being far from clear in the US election, investment commentators have warned of sustained volatility across asset classes. The predictions from pre-election polls which largely pointed to a Democrat win have not been borne out, leading to a shifting of positions and portfolios.
The UBS house view, set out by the chief investment office of its wealth management division, notes that equity markets, reacting to an increased probability of President Trump winning re-election, saw US stock futures gaining over the course of the evening, with the S&P 500 up as high as 1.3% and the tech-heavy NASDAQ 100 index surging nearly 3%.
“The Chinese yuan has sold off with USDCNH +0.7% on fears of continued trade tensions with China. We continue to anticipate elevated market volatility until there is more clarity on the election outcome,” wrote the team. “US Treasury yields have been volatile, initially rising on expectations of a Biden win, subsequently rallying on the higher probability of a Trump win, and then giving up some of those gains with the 10-year US Treasury yield now resting at 0.82%. 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.”
Giles Coghlan, chief currency analyst at FX trading shop Henyep Capital Markets (HYCM) said, “As we are already seeing this morning, the Dow Jones and US Dollar will be in a volatile state until there is a clear outcome that both parties will accept. US stocks are selling off on the uncertainty, reversing the gains expected from a Biden victory as projected by the polls. This will also have significant ramifications on the performance of other major currencies and assets. So long as the uncertainty remains, I’m expecting investors to sell global equities, and their holdings in currencies like the Euro and US Dollar. At the same time, we should see inflows into the Japanese Yen.”
Meanwhile Morgan Stanley equity strategist, Donald Garner, noted that investors should, “Continue to play defense,” as the uncertain outcome of the US election is likely to leave the consensus trade for an emerging markets (EM) and ‘Value’ investment strategy rotation in difficulty.
“The lack of a clear outcome thus far to the US election in relation to both the Presidency and the Senate challenge the consensus which had almost priced in a [big Democrat win] two weeks ago in our markets,” he writes. “With Covid incidence worsening in Europe and the US we think that EM likely underperforms versus Japan with Value and Old Economy cyclicals giving back some of their recent gains.”
The impact of the election on investment activity in the markets more broadly was actually less significant than other factors, such as COVID-19, which have real effects on productivity, argued Simon Maughan, head of trading alpha at Liquidnet, although the noise around the event has taken some investors attention away from positive corporate results.
“A more recent narrative is that uncertainty around the election has caused investors to ignore the strength of corporate earnings,” he wrote. “Over the weekend Barron’s reported that with 60% of the S&P 500 having reported, 81% of stocks have beaten expectations. Consequently, analysts have maintained their view that earnings will expand by double digits in 2021.”
Last week saw sell-offs in Apple, Facebook and Twitter which he observed was counter to their headline growth ahead of consensus. Some analysts saw the expectation of a big win for the Democrats as heralding increased regulation for big tech firms which may have triggered the fall in holdings.
“Consider that Q3 saw the fastest growth in GDP on record and that many companies did not provide analysts with the usual guidance,” Maughan noted. “It is reasonable to assume that neither analysts nor the companies had a clear indication of how unprecedented economic growth would impact sales and profits. Then consider the backdrop of rising COVID-19 cases and new lockdowns in Europe, which raised the spectre of another period of slow growth. It is now easier to imagine why exceptional Q3 numbers were treated as such.”
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