The 2020 US presidential and congressional elections are less than four months away.
So far, it seems, investors don’t know what to make of that. Expected market volatility for November is historically high, a sign of investor uncertainty around the implications of the possible outcomes.
Of course, that isn’t to say there aren’t still gains to be had.
How should you be approaching the 2020 election in terms of your investing strategy? We’ve rounded up what some of the biggest Wall Street firms are saying about the 2020 election, and what strategies they’re recommending for profiting no matter the results come November.
JPMorgan’s Head of Cross-Asset Fundamental Strategy John Normand said in a note last week that amid heightened uncertainty surrounding the election and the coronavirus pandemic, investors shouldn’t necessarily stay on the sidelines.
Specifically regarding the election outcome, Normand said tech stocks should be safe in a Biden presidency, as the former vice president isn’t on the record saying he wishes to break up large firms.
Normand also said healthcare stocks could benefit from a Biden presidency due to the expanded health insurance proposals.
On the overall outcome, Normand said: “The most positive outcome would be a Biden victory alongside a Republican Senate, which implies fewer market disruptions from foreign policy and no change in tax policy.”
Read more: JPMORGAN: US stocks are staring down a double whammy of spiking COVID-19 cases and an uncertain election — but traders shouldn’t stay away entirely. Here are 3 strategies for those looking to stay invested.
Lisa Shalett, Morgan Stanley’s chief investment officer for wealth management, says investors are actually too worried about the outcome of the election and its policy implications.
“Politics may loom large, but material policy shifts seem unlikely in the near term,” she said. “While many polls now suggest that a Democratic sweep in November is plausible, we don’t see immediate tax hikes and costly expansions of the healthcare system as a likely outcome.”
Instead, they should be focused on potential inflation, inaction from Congress on a second round of COVID-19 economic stimulus, and potential fallout from second-quarter earnings.
Read more: Morgan Stanley’s wealth-management CIO warns investors are misreading the biggest risks to markets right now — and shares 4 ways to maximize returns as earnings roll in.
November futures for the CBOE Volatility Index (VIX) — which derivatives traders use to bet on the direction of volatility in the S&P 500 — are trading historically high compared to previous election years, according to a note from David Kostin, Goldman’s chief US equity strategist.
In other words, investors are paying extraordinarily high premiums to hedge their portfolios.
While Kostin says this is indeed the right thing to do, he thinks investors ought to wait a month longer until December, when implied market volatility is lower.
“Although the 20-Nov option expiration offers two additional weeks of cushion beyond 3-Nov, the potential for delayed results, a precedent for extended vote-counting, and a slightly inverted term structure lead us to prefer extending hedges to the 18-Dec quarterly expiration,” Kostin said.
Read more: GOLDMAN SACHS: Wall Street is bracing for a historically wild stock market as the presidential election nears. Here’s a surprising yet simple strategy for protecting your portfolio — regardless of outcome.
Vishal Vivek, an equity derivatives associate at Goldman Sachs, said in a recent note that investor uncertainty around the 2020 elections also stems from state-level contests, which have implications for how companies around the country do business.
“We’re most focused on identifying names with stock-specific drivers of volatility, as opposed to broad drivers such as potential weakness driven by changes in corporate taxes,” Vivek said in a recent note. “State-level propositions included on the November ballots are important sources of volatility, that are likely under the radar of investors.”
He accordingly put together a list 17 stocks to look at around election time using call options.
Read more: GOLDMAN SACHS: These 17 trades can help investors maximize their gains from the stocks most affected by the US elections in November.
Solita Marcelli, the Americas chief investment officer at UBS Global Wealth Management, says investors should be starting to prepare for how their strategy will be shaped by different election outcomes.
She’s come up with four scenarios, and a plan for each.
In the case of a Democratic sweep, she recommends investing in sectors like industrials, materials, tech, utilities, and renewable energy.
If Republicans win big, she recommends turning attention toward banks, energy, defense, and corporate high yield bonds.
If Biden win the presidency and Republicans control at least one chamber of Congress, she says consumer discretionary, consumer staples, industrials, and materials would do well — but not so much energy.
And if Trump wins with Democrats controlling at least one side of Congress, an infrastructure bill would likely come to pass, but continued trade uncertainty would be bad for industrials and materials.
Read more: UBS has compiled an investing playbook for all the possible election outcomes. Here are the 6 trades it recommends to profit from a Trump triumph — and 10 for a Biden blue wave.
Amid the coronavirus pandemic, the healthcare sector is up year-to-date.
But not everyone in healthcare has shared in the gains.
This is because of investor fears of the healthcare policy implications of a Joe Biden presidency, said BTIG’s Julian Emanuel, the chief equities and derivatives strategist, in a recent client note.
But the concerns are unfounded, Emanuel said.
“We believe markets overestimate a Biden presidency’s desire to radically change Obamacare. It’s not just that VP Biden was an instrumental player in getting the landmark ACA legislated into being, it’s that he’s said ‘If you like your health care plan, you can keep it’ as recently as 7/13,” Emanuel said.
Because of that, he’s put together a list of 19 healthcare stocks he expects to do well in the second half of 2020, including companies like Merck, Pfizer, CVS, and more.
Read more: Buy these 19 cheap healthcare stocks poised to beat the market regardless of election outcome and the fate of Obamacare, BTIG says
Ryan Detrick, senior market strategist at LPL Financial, said in a recent note that investors should be most focused on the outcome of the Congressional elections.
Based on an analysis of the S&P 500’s performance during different Congressional makeups, he said the most favorable outcome is a split Congress.
When the House and Senate are split, the index’s average annual returns are 17.2% vs. 13.4% when both are Repulican-controlled and 10.7% when Democrat-controlled.
Read more: The stock market cares more about the makeup of Congress than it does the winner of the presidency. Here’s why.
Additional reporting by Marley Jay and Matthew Fox.