With just four days to go until the US election, a sense of creeping dread is manifesting on stock markets globally. This is perhaps not uniquely different to any other time the presidential contest has been so binary and the polls remain so close. It however feels different this time only because the war of words, vitriol and outright mud-slinging have transformed this presidential debate into something closer to a farce. What markets hate most is uncertainty and this seemingly binary outcome is ultimately as uncertain as it gets. We see headlines screaming how each candidate would be negative for certain sectors of the economy but as much as the President can express what he/she would like to see get done, it’s the role of the Congress that ultimately gets it done or not as the case may be. To this end, it takes many months to see what the actual effect of a presidency has on different parts of the economy as deal making across political lines takes time. Sentiment and performance will naturally ebb and flow as investors attempt to move with the likely shifting political landscape.
We would argue that positioning for a Democratic or Republican win is to all intents and purposes a trade around short-term noise and political trading doesn’t have the best track record for success. We saw in the run-up to the Brexit referendum just how wrong polling and predictions can be. It will be difficult to frame any positioning until we see both the ultimate winner in the presidential race but also the shape of the Congress and who controls the House. More importantly and focussing more on fundamental valuation analysis, the US equity market is arguably very long in the performance tooth and expensive relative to its recent history and for this reason alone we are cautious on US stock market performance and subsequently have been underweight US equity assets at this time.
A definitive landslide in both the House and the presidential choice from either party will likely see the greatest risk scenario. Under that outcome, controversial legislation would be easier to pass affecting many parts of the economy and it’s no coincidence that the US stock market performs better under a divided government where political gridlock ensures the appropriate checks and balances remain in effect. Clinton has already been vocal in her criticism of drug pricing and likes to bash Wall Street whenever she gets a chance so a Democratic controlled House under her presidency would clearly affect these two areas of the market negatively albeit a Clinton win would be seen as positive for overall investor sentiment. On the contrary, market reaction to a Trump win would be seen as very negative as the uncertainty meter dial would shoot to 11 and as already outlined, markets detest uncertainty more than anything else.