An Investor’s Election Survival Guide—CIO Weekly Perspectives

By Erik L. Knutzen, CFA, CAIA, Co-CIO, Multi-Asset Strategies,

Jeff Blazek, CFA, Co-CIO, Multi-Asset Strategies

Brace for this week's uncertainties rather than trying to trade them, and stay focused on the better-known headwinds and tailwinds in the longer-term outlook.

After a long and eventful campaign, it is finally here: U.S. voters will choose their next president and members of Congress tomorrow.

How should investors prepare and respond?

As we have written leading up to the election, we consider it very risky to pick a winner and tilt portfolios accordingly, especially when polls are this close. Opportunities may arise for tactical positioning in the weeks following the result, but throughout this period we believe investors should stay anchored to two longer-term dynamics that are likely to persist whoever is in power: a resilient U.S. economy and a deteriorating U.S. debt profile.

Margin of Error

We have no edge when it comes to picking election winners, and we suspect the same is true for most investors.

Polling averages and prediction markets have gravitated toward a win for Donald Trump over recent weeks. Financial markets also appear to be pricing higher odds of a Trump presidency and perhaps even a Republican clean sweep of Congress and the White House, as evidenced by surges in Treasury yields, the U.S. dollar, cryptocurrencies and financial stocks.

We note that leaning portfolios into the potential Trump victory outcome is risky. First of all, it is important to remember that the 2016 investment playbook for a Trump win may not be a good guide to a Trump win in 2024: The political and economic backdrop is quite different now, a Trump victory would be far less surprising, and Trump is more of a known quantity than eight years ago.

Second, most polls remain within the margin of error both nationally and across swing states, and there is a decent likelihood of divided government, which would be a check on the president's ability to enact significant policies whoever wins.

Above all, with markets already priced for a Trump victory to a significant degree, there may not be much upside left in these trades. Should Trump win, and especially if he wins but Congress remains divided, these "Trump trades" could in fact fade.

By contrast, a Harris victory could trigger quite a sharp reversal—and given that her potential victory would be a surprise to the markets, this unwind could take some time to fully price.

Peak Volatility Is Here

With polls this tight, however, it is possible—perhaps even probable—that we will not know the result for several days or even longer. Uncertainty around control of Congress, particularly the House, could also extend longer than uncertainty over who is in the White House. And a contested result could add still more days or weeks of market volatility.

We have been anticipating a pick-up in volatility as the election nears, and this week is likely to see a peak in that volatility, lasting until we have an unambiguous outcome. This is a key reason why we have been counseling against taking substantial active positions—particularly active positions tilted to one or other election result. The exception would be in assets that can help to diversify portfolios and dampen their volatility, such as gold and other commodities.

Looking Through the Election

Moderate active positioning should enable investors to look through the volatility and uncertainty of the coming days and focus on some of the better-known headwinds and tailwinds in the longer-term outlook.

As Ashok Bhatia and Brad Tank wrote last week, fixed income arguably faces the strongest headwinds. Credit spreads are very tight. The U.S. Federal Reserve's easing cycle, which commenced not even seven weeks ago, has been met with a strong upward move in Treasury yields across the curve, as the market has recalibrated for a higher neutral rate and greater term premium given growing fiscal concerns.

U.S. growth and inflation data has been strengthening over the past two months, and that story continued in last week's GDP and personal consumption expenditure numbers. Friday's weak nonfarm payrolls data was disrupted by strikes and hurricanes, and contradicted by the much stronger-than-expected private payrolls growth reported by ADP on Wednesday. Overall, we think underlying economic resilience could force the Fed to pause its rate cuts early in 2025.

These dynamics are likely to persist regardless of who is in the White House. As Joe Amato noted two weeks ago, while Trump's positions on tariffs, immigration and fiscal policy might imply faster inflation and deeper deficits, Harris is not exactly dovish on trade and the border, nor hawkish when it comes to reducing debt and spending.

The same growth dynamics that weigh on bonds could be a tailwind for some parts of the equity market, however. Again, once any ambiguity about the result is resolved, the fiscal policy and risk appetite that underpins this economic and equity-market strength are likely to survive the election. Some certainty on the political scene may help the market to refocus on the fundamental economic environment and that, in turn, could finally trigger the broadening of equity-market performance beyond U.S. mega-cap technology stocks that we have been anticipating for much of this year, and saw during the third quarter.

That is our Survival Guide for the week, and the potential uncertainties beyond. We think investors should brace for volatility rather than trying to trade the polls. Some tactical opportunities may arise once the result is clear, but remember to account for what is already priced into markets. And, above all, stay anchored to the longer-term dynamics that will outlast the political noise.