Friday, September 17

Posthaste:’Non-event of the century’?: Why investors should faze out Nov. 3 and pay attention to a more significant vote later this week

Good morning!

Investors were a ball of anxiety last week, dumping stocks and booking profits, as they feared the worst possible fallout from the US presidential elections.

Investors weren’t really taking sides and were less concerned about either a US President Donald Trump or former vice-president Joe Biden victory, but they were more concerned about chaos, election uncertainty, and even riots or some kind of civil unrest post elections that could interrupt economic activity.

Worries about a contested election, combined with rising coronavirus cases around the world, is a recipe for short-term political and economic decline that could affect corporate earnings.

And that’s what the market cares about the most — not the ideology of the two candidates or about the state of democracy.

Based on these metrics, some investment managers are asking their clients to look past the presidential election — and pay more attention to another vote the day after.

David Zevros, analyst at investment bank Jefferies LLC, said in a note to clients Sunday, that a highly dovish US Federal Reserve backstop will be the market driver no matter who takes the helm of the White House or control of the Senate.

“That being said, there is more risk in the longer term from a’blue wave,’ due to the potential for increased debt-financed stimulus and the concentration of power,” Zevros said. “If risk markets want to ramp up sharply on a blue wave, I would fade it, and if risk markets want to freak out on a contested election or divided outcome, I would buy a decent-sized dip. However, the market may not move very much and this election could be the financial markets’ non-event of the century.”

Indeed, while record number of Americans are voting on November 3, investors should be paying more attention to a much smaller group of Americans voting later in the week, at the US Federal Open Market Committee in Washington to decide on interest rates. The FOMC meeting starts on Nov. 4 and will end with an announcement on Nov. 5.

The Canadian Imperial Bank of Commerce economists Avery Shenfeld and Benjamin Tal (among others) note that while Trump has better odds than what some polls suggest, the data still favours a Biden win, with control of the Senate more of a toss up.

“Markets shouldn’t be dazed by that as-expected outcome,” the economists wrote.

The CIBC economists also don’t expect the FOMC members to “shake markets much in either direction.”

“Given the size of the tail risks in the days ahead, traders are likely to pare risk positions by the start of the week, and we can see the wisdom in doing so. But with two significant votes on tap, the surprise is most likely to be how few surprises the market has to deal with,” the CIBC economists said.

Regardless of who wins, a few things will not change for the United States for some time to come: rising coronavirus cases, economic lethargy and joblessness — and that would drive markets more.

Bank of Montreal’s chief investment strategist Brian Belski is also unfazed by the presidential elections.

“We have found through our years of work that the markets tend to go up over time whether a Democrat or Republican is in the White House and it’s ultimately the direction of the economy, not politics, that dictates stock prices,” Belski said in a note last week.