Here's How I'm Investing Ahead of a Likely-Contentious Presidential Election
There's a good chance the U.S. presidential election will be prolonged and contentious. Here's how I'm positioned ahead of the uncertainty.
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We get the U.S. presidential election and a Fed meeting this week, both of which should provide us with some clarity. Earnings will also play a factor.
The Fed
Let’s start with the Fed, because I think the Fed is easy:
- Cut 25 BPS. That’s what they were planning on doing and Friday’s job report gives them the ammunition to do so.
- Push back on the pace of rate cuts going forward. This will be relative to last meeting, since the market has already dialed back significantly on rate cuts in 2025. They will mention a more balanced concern between a potentially better job market (see "The Ugly Truths Behind the NFP Jobs Report") and signs that inflation may be stabilizing above their target level. The jobs data was definitively impacted by hurricanes and strikes, but the JOLT Quit Rate really caught my eye, as it dipped to levels that we didn’t see until mid-2008.
- Higher neutral/terminal rate. This has been a topic of discussion for us and we think that, although markets have moved to the lower end of our band (3.5% to 4%), there is room for that to edge higher.
The market has moved closer to our views and we expect that it will continue to do so, but I’m not overly bearish here as it has been a rapid move.
Expectations
Who had a weak job report, 10 BPS higher on the 10-year yield?
This is just a reminder as we try to estimate what the election might do, that markets can often behave in unexpected ways!
The Election
Frankly, I think there are too many permutations to properly analyze. There is virtually no scenario that would “surprise” me. I don’t think all scenarios are equally likely, but I could be convinced on a lot of them that they are possible.
Also, with the cop-out of the previous section, I’m not sure it is easy to interpret how markets will react to what could be quite complex outcomes.
Having said that, it would be irresponsible not to have some sort of a playbook coming into this. That is particularly true as I will be on Bloomberg TV at 9 p.m. ET on election night trying to digest the information in real-time
Best case for the markets:
- A clear winner on the presidential side with gridlock established. If we can wake up Wednesday morning (better yet, go to bed on Tuesday night) knowing that there is a clear and obvious winner for president and that there will be gridlock, we can buy stocks and bonds. I don’t think there is a better case for the market than this, and we should get some indications if this is happening, quite early in the evening.
Worst case(s) for the markets:
- I think there are two bad cases for markets, both of which are very different.
- A clear sweep. Anything where it is clear that the president has been decided and that they will have the house and the senate firmly in their party’s control, would likely be bad for markets. The “mandate” would (rightfully so) convince that party that they can implement even some of their more extreme policies. I don’t see that being good for the deficit. For stocks, it might turn out to be good, but I think, at least initially, that the response to this would be negative. It is ironic that we get a situation where the country really supports one ideology and Wall Street doesn’t like it, but that’s my sense of how this would play out.
- A prolonged and hotly-contested election result. I’m thinking more at the presidential level. Even there, I think if the house and the senate are split, even a hotly-contested presidential result might not hurt markets, at least not for a few days. While the Geopolitical Intelligence Group staunchly believes that we will have a legal and normal transfer of power and that all the systems, the checks and balances, will work, the longer any dispute lingers, the more likely it is to affect domestic behavior.
- There is a risk that if this goes on for an extended period, that our enemies (or competitors) will take advantage of what they might view as an opportunity. The media (and nation) will be fixated on internal issues and their may be a perceived power vacuum if the contested election reaches vitriolic levels (which cannot be discounted with the power of social media).
Beyond that, I just think there are too many possibilities. We might not know the house or the senate right away. Again, I think any uncertainty will be digested by the market if gridlock looks likely.
I think a few days of contested results and recounts is pretty much built into markets. I’m not sure (meaning I don’t think) that contested results extending well into the following week, with rhetoric getting increasingly nasty, is priced in (I’d like to say that possibility is extremely low, but I’m not sure it is that low).
It would be great if election night gives us clarity, even if that clarity is bad for markets, but that is not a certain outcome. I do think many people are being a bit cavalier about how easily we will absorb a “contested” election — since I think it very much depends on how hotly that election is contested (if we get to that point at all).
Not sure this is much of a game plan for the election, but it is the best that I can come up with at the moment.
Bottom Line
We will get through this election. The system will work as intended and we will adjust and adopt our strategies appropriately.
I think we will all have to adapt on the fly on Tuesday night and the following days as we get some clarity in the elections. I wish I had a stronger view on the outcome, but I just don’t, so I’m going in as I have been (mildly underweight stocks, very underweight tech, buying muni closed-end funds on weakness and overweight Chinese stocks).
Good luck with this week and I cannot believe we still make it dark extra early on purpose!
At the time of publication, Tchir had no positions in any securities mentioned.
