Advisors should prepare for a highly charged election year, Schwab executives said today

With few surprises expected this Super Tuesday, the day when 15 states hold their 2024 nominating contests, financial advisors should be focusing on how they plan to handle what is likely to be an emotional presidential election and year, Schwab executives said during a market update podcast.

“We have eight months to go before the presidential election. I think we’ll see a very emotional time for investors, because this is going to be an emotional election. And it’s going to get more emotional as we head into the summer and fall,” said Michael Townsend, managing director of legislative and regulatory affairs at Charles Schwab.

“It’s incumbent on RIAs to really be connected to their clients and make sure that clients are not making emotional investing decisions during the run up to the election and into the fall. Because it’s going to be a crazy time,” Townsend warned.

Kathy Jones, managing director and chief fixed income strategist at Schwab, echoed Townsend’s sentiments. “We’ve got a lot of noise in the market right now and that’s boosted volatility," she said. "There’s lot of confusion about the direction of Fed policy, fiscal policy, all of these things can affect the overall level of volatility in the market.

“But through all that noise, I think keep in mind the trend in inflation is moving in the right direction. The Fed, although they’re making a lot of noise and creating a lot of confusion, it’s a matter of when they cut, not if they cut. So, we continue to think that having some intermediate duration five- to seven- year high-quality bonds in portfolio continues to make sense for clients,” Jones said.

Townsend said that former President Donald Trump is expected to sweep today’s primaries. "That won’t get him to the exact number of delegates he needs to clinch the nomination, but it will certainly put him close. I think the only remaining question on the Republican side is whether Nikki Haley, who is the last GOP candidate standing, calls it quits later this week or continues her quixotic campaign,” he said.

Haley announced she was suspending her campaign Wednesday morning.

On Thursday, President Biden will deliver his State of the Union speech, which Townsend said marks the kickoff of the general election campaign in many investors’ minds.

“We’re obviously headed for a Biden-Trump rematch, a rematch that not many voters are very excited about,” he noted.

Recent polls have shown that more than 60% of voters would prefer someone else. An AP poll yesterday found that a stong majority of voters are not confident that either Joe Biden or Donald Trump have the mental ability to serve effectively as president.

“It’s a pretty astonishing result when you think about it," Townsend said. "So we have this race that no one seems to want. One of the things I’m getting asked a lot is about what happens if one of the candidate needs to be replaced due to a health issue. There is a mechanism to do that at the conventions this summer. It would be messy, it would be chaotic. But it is doable."

He said he is also being asked about third-party candidates, particularly Robert F. Kennedy Jr., who is running as an independent and polling in the low double digits. “I do think given the unpopularity of the two major candidates, it feels like a third-party candidate could play a role in this,” he said, noting, however, that Kennedy has only qualified to be on the ballot in one state.

“The other thing I would say is it is really important to watch is the battles for control of the House and Senate because [despite] all the policies that a presidential candidate can propose, it’s Congress that will have to turn them into laws,” Townsend said.

The next Congress has some big issues for the markets on its agenda, including another debt ceiling debate in 2025 and the expiration of the 2017 tax cuts.

“Right now, I think Republicans have the upper hand to capture the Senate. And I think Democrats have the upper hand to capture the House. So we would potentially have both chambers flipping in opposite directions, something that has never happened. But I think there is a decent chance that we will have a split Congress again. So there is a long way to go and lots to watch as it all unfolds,” he added.

Will the political environment have an outsized impact on the stock market this year? “If you plug in election uncertainty and maybe election outcome as a factor that could cause some spikes and bouts of volatility, I don’t think it’s a stretch to say that,” said Liz Ann Sonders, managing director and chief investment strategist at Schwab.

“What you tend to see happen is more volatility and action occur at the sector level,” Sonders said. “In the lead-in to an election where policy proposals are put on the table, the likelihood of them moving a market can effect sectors like defense and healthcare. Already we’ve seen days or weeks if there is chatter around an increase in tariffs, you can see some movements in the short term. But none of this is to suggest you should trade around this.”

Sonders noted that the U.S. election is not the only volatility driver. Some 45% of the world has elections this year. However, the rematch between Biden and Trump is unique and is the first in the modern era of the primary system, while the seventh in history, she said.