In less than a month, Americans will vote in one of the most consequential elections in US history. But on Wall Street things are eerily quiet, as the so-called smart money is reluctant to wager on what’s about to happen.
“Never bet on the flip of a coin,” said George Ball, head of the Houston-based investment firm Sanders Morris Harris. “The election is too close to permit thoughtful investment positioning.”
Hedge funds aren’t reducing their stock positions the way they historically do ahead of elections, and instead have elevated exposure to equities as the S&P 500 Index continues to set records, according to Goldman Sachs prime brokerage data going back to 2008. Meanwhile, options traders are more focused on the Federal Reserve’s interest-rate cuts and the health of the US economy, putting the Nov. 5 vote lower on the list of immediate priorities, market veterans say.
“Concerns about the elections are around fifth in line behind the war in the Middle East, the explosive moves in China, the push-and-pull of US economic data and shifting Fed easing expectations, upcoming earnings season, etcetera,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
The most recent election polling averages from Real Clear Politics show Democrat Kamala Harris with 49.2% support nationally, and Republican Donald Trump at 47.2%. But with the Electoral College, national averages are far less important than state-by-state polls, which essentially show a neck-and-neck race. And the chance of either party sweeping the presidency and both houses of Congress is considered low.
Wait-And-See
“First, it’s a very close presidential race, especially in the swing states,” said Eric Sterner, chief investment officer at Apollon Wealth Management. “Second, both candidates have very ambitious economic goals, and I highly doubt either will be able to fully implement these campaign promises unless their party takes the White House, the Senate, and the House.”
Hedge funds are taking a wait-and-see approach to the election, waiting until there’s more clarity before making significant politically connected investment bets, said Jonathan Caplis, chief executive officer of hedge fund research firm PivotalPath. The approach has worked so far this year, as US long-short hedge funds have posted an 11% gain through September, which is in the top quartile of rolling nine-month returns since 2010, according to PivotalPath.
“Most funds are more likely to lean into ongoing market growth than radically cut back because of a still currently uncertain US election result,” Caplis said. “It’s much easier to discern the investment impact of a Fed interest-rate cut than a hazy statement from the Trump or Harris campaigns.”
Meanwhile, US equity options volatility is relatively high compared to levels over the last year, suggesting traders are taking a defensive posture. But there are few signs that it’s primarily because of the elections, derivatives pros say. Instead, options trading is mostly being driven by near-term catalysts such as the upcoming payrolls report, high Asian market volatility and geopolitical tensions.
S&P Options Implied Volatility | Options cost after US election holds steady
In addition, the growth of shorter-dated options is allowing traders to wait longer before betting on a specific event.
Pick Stocks
Of course, none of this is meant to say there’s no way to trade the election right now. But portfolio managers and strategists advise investors to look at specific stocks and sectors rather than broad indexes.
UBS’s trading desk recommends regional bank stocks, writing in a note to clients this week that it favors a tactical downside position in China stocks and that the so-called Trump trades are making a comeback. A Republican government is generally seen as positive for regulation-heavy sectors such as financials and healthcare, while the former president’s tough stance on trade and use of tariffs, especially against China, can spell trouble for Chinese stocks.
Energy is another popular election trade, with a Trump win seen as better for traditional energy producers, while a Harris presidency is considered bullish for the clean energy industry. Two Goldman Sachs indexes that follow investments linked to Democratic and Republican victories show how different sectors are reacting to developments in on the campaign trail.
Of course, there’s one last way to play the vote, which is to apply patience. Some professional investors advise everyone who plans to be in the market for a long time to look past the chatter, wait until the results are in and the picture is clear, and then position themselves accordingly based on all the available information.
“Long-term investors should generally avoid making meaningful tactical moves ahead of presidential elections, especially when it is highly contested,” said Joseph Caplan, portfolio manager at Caplan Capital Management in Highland Park, NJ. “While certain sectors may face increased probabilities of headwinds and tailwinds under the different administrations, there are good reasons to avoid wholesale portfolio shifts.”
This article was provided by Bloomberg News.