(Bloomberg) — One more trading session to go. That’s all Wall Street has left before American voters choose their next president on Tuesday, potentially shaping the direction of the economy for the next four years.
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Traders are excited about the possibilities and are constantly monitoring the latest polls and movements in the election betting markets to determine who has the edge: Republican Donald Trump or Democrat Kamala Harris, and what that means for their positions. There is speculation in some corners that Wall Street is betting on Trump. But when it comes to actually putting money into the stock market based on that, it’s quiet.
Investment professionals know there is a windfall to be had if they declare a winner before it happens. The problem is that these elections are far too close for that, making the risk of a miss too great for many.
“We’re not positioning ourselves for an election outcome because it’s a coin flip,” Eric Diton, president and director of the Wealth Alliance, said in an interview. “There’s no point in making a bet.”
Most traders see volatility coming this week, possibly a lot of it, with the likelihood that a disputed outcome will delay the vote count for weeks or even months. This explains why the Cboe Volatility Index has climbed above 20 in the past four sessions, a level that usually indicates increasing tension in the stock markets. And that’s why investors are less eager to pick winners and losers based on who they think America’s next president will be.
“The polls have been so wrong in the past,” said Dave Lutz, stock trader and macro strategist at JonesTrading. “There’s just no edge to see who wins.”
Safety in cash
The other positioning challenge is the number of additional catalysts around the vote that are likely to move the market. Election Day will be quickly followed on Thursday by the Federal Reserve’s interest rate decision and Fed Chairman Jerome Powell’s press conference, where he will provide details on the central bank’s interest rate path. And a large share of US companies have yet to report their earnings, with chip giant Nvidia Corp. reporting results. expected on November 20.
This explains why Lutz is not specifically positioning himself for the elections. What he recommends instead is to “sit on some money” that can be deployed when short-term opportunities arise, such as individual stocks or sectors exhibiting knee-jerk reactions when a winner emerges.
“I would say a lot of investors are positioned exactly that way,” Lutz said.
Take Robert Schein, chief investment officer at Blanke Schein Wealth Management, who said he increased his cash equivalents from his usual 5% to 10% before the election. His strategy is to be prepared to dive into assets when the results inevitably lead to volatility in at least some parts of the market.
“Investors need to understand the ongoing election risks,” Anwiti Bahuguna, chief investment officer of global asset allocation at Northern Trust Asset Management, said in an interview. “Traders can’t even position themselves at this point because it’s so speculative, and traders don’t know what policy proposals would actually be passed through Congress by either candidate.”
Perhaps unsurprisingly, the markets are looking nervous. The S&P 500 is trading near its all-time high, while the VIX is above 20. The last time the S&P set a record with the so-called fear gauge at this level was during the outbreak of the delta variant of the coronavirus in March 2021. Meanwhile, hedge funds are betting on even bigger price swings. Major speculators have gone net long on VIX futures for the first time since January 2019, data from the Commodity Futures Trading Commission showed earlier this month.
Options market data shows that traders are remaining defensive and using above-normal valuations to protect against a quick sell-off, said Rocky Fishman, founder of the Asym 500. Part of this is due to the flood of reports and data that will emerge in the coming days . , including the Fed decision, earnings and inflation numbers, he added.
“While markets are clearly pricing in a high-volatility day on Wednesday when we learn the election results, the period surrounding it is far from calm,” Fishman said.
Beyond the elections
Corporate insiders are also hesitant to play the stock market. Just 261 corporate executives bought shares of their own company in October, the fewest since at least 2017, pushing the buy-to-sell ratio to its second-lowest level since spring 2021, according to data compiled by the Washington Service Show.
Investors looking for a safer stock play should instead look past the election noise, some Wall Street professionals say.
“The election is so unlikely that we expect a volatile period in the coming month,” said Northern Trust’s Bahuguna. “But what ultimately underlies the stock market are decent corporate profits, strong economic growth, falling inflation and a Fed rate cut.”
Northern Trust is overweight US equities based on resilient economic strength and underweight bonds to hedge against inflation risks. The firm also has an overweight in real assets, including infrastructure, natural resources and real estate, to protect portfolios against future turbulence if the labor market remains tight and economic growth remains robust.
Others are looking at corporate earnings, especially higher quality balance sheets, as interest rates remain high and the Fed is just starting to cut spending.
“Interest rates are still restrictive and increasing volatility is more likely toward the end of the year, so a more conservative approach is appropriate,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.
The point in all of this is that in elections where there is no clear favorite, patience is the safest choice for investors. That’s what Wall Street is preaching – at least for now.
“If it was a cleaner decision, it would be baked into the market and there would be little left to exploit,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “But in something this tight, it’s better to look over the horizon and stick to what the macroeconomic situation will look like in six to 18 months, rather than just the outcome of that day.”
–With help from Natalia Kniazhevich and Alexandra Semenova.
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