Simply put, there are too many risk factors for investors to accurately work into their assumptions for stocks. One thing we know for sure is that there is going to be some volatility around the election.
Moving into the election, there are potential changes to income taxes among the wealthy and corporations (both are earnings negative), a soaring federal debt as a result of pandemic stimulus and the possibility of a ballot-counting issue. Many on Wall Street point out that, absent a highly Democratic-controlled Congress, no policy changes are likely to be so drastic, yet those changes may emerge.
However if the election isn’t decided in a timely manner, markets will hate the uncertainty — they always do.
“The only thing that’s certain in this election is that there is going to be a lot of uncertainty,” Shawn Cruz, senior market strategist at TD Ameritrade said, referring to, of many things, the ballot-counting concern.
Most elections bring about short-term volatility, followed by more policy and fundamental stability than perhaps anticipated, but this election is by no stretch of the imagination a cakewalk for investors. “Looking at markets trying to price in any sort of an outcome of this election, to me, is way to early in the game. Years like this year where you have very stark policy agendas being put on the table and then an even more uncertain outcome, it’s going to be very difficult for markets to really start pricing anything in until November.”
Cruz mentioned that recent volatility is implying a large market swing in one direction or another around election time. Stocks have begun to rebound in the last week or so after a sell-off based on fears that the V-shaped economic recovery may not continue as such. The S&P 500 is still down more than 5% in the past month, a move not just centered on valuation re-ratings in growth tech, but also cyclical economic concerns in other sectors.
If volatility continues based on election risks, here’s a lesson from Cruz: “I don’t know that you want to position your portfolio for a certain outcome. You just want to make sure you’re at least balanced and you’re ready from a portfolio standpoint to handle a lot of volatility and choppiness back and forth.” This could mean buying stocks into weakness and selling ones into strength.
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