Pre-election ideas for investors: Lean into what you know (not what you don’t)

There is no shortage of commentary on polls, betting markets, and potential market impacts of the upcoming US election. Most of these predictions are not things in which investors have an edge. I prefer to focus on things I know or areas where I think we have an edge. Based on conversations with my Investment Strategy & Solutions Group colleagues, here are a few ideas we’re leaning into.

Price Markets appear to be pricing in a higher probability of a Trump win based on the 65-basis-point backup in US 10-year yields and possibly some recent sector outperformance in financials. To the extent prices are skewing in one direction or another, like in yields, this may be an opportunity to move longer in duration in case we get a Harris win. Our active allocation team has found it helpful to have yield or price targets that line up against the four key potential political outcomes (Harris/Democratic sweep; Harris/divided government; Trump/Republican sweep; Trump/divided government), so that we can compare that target to the outcome to judge whether the asset is over- or underpriced.

Macro backdrop The economy is humming — Q3 GDP was just reported at 2.8% and the inflation rate has been decelerating to ~2.5%. Our US Macro Strategist Mike Medeiros just wrote a note about how hiring has slowed but layoffs have been tame. In combination with the Fed’s easing cycle, this sets us up well for a good risk environment where earnings growth remains solid. 

Volatility The interest-rate markets are pricing in more implied volatility than the equity markets. Perhaps that’s because rates are the more direct expression of higher deficits whereas earnings growth has been good and broadening outside of the mega-cap tech companies. Again, duration positioning around the outcome could be attractive. I think that the range of outcomes with a Republican sweep are wider than a Harris/divided government outcome, at least where the budget deficit is concerned. The Committee for a Responsible Federal Budget recently put the range for the deficit under Harris at between US$0 to US$8.1tn with US$3.5tn as the central forecast and a range of US$1.5 to US$15.2tn for Trump with US$7.5tn as the central forecast over 10 years.

Earnings Our equity earnings estimates over the next 12 months are in the low double digits in North America, APAC, China, and ACWI. The only exception is Europe at 6.8%. This is also a good setup for excess returns to be driven by earnings more than by multiples expansion. 

Aligned with these views, I think bond yields are becoming more attractive, and volatility may give us better entry points to increase our allocations to equities and spreads. Gold is a position that is likely to continue to do well in either outcome as higher deficits, central bank buying, and lower real rates are all supportive. I think emerging markets are the most interesting place to look for value given their downtrodden state over many years. I will be monitoring ongoing China stimulus measures, the USD, and the state of global trade and the global cycle as signposts for our views on this market.