Strategists at JPMorgan Chase & Co. and Morgan Stanley agree: bond yields will set the direction of travel for US equities in the aftermath of Tuesday’s election.
A win for Donald Trump together with a Republican sweep of Congress followed by limited moves in the 10-year Treasury yield on expectations of improving economic growth would be positive for equities, according to a Morgan Stanley team led by Michael Wilson. In that case, cyclical stocks such as financials and industrials would outperform, they wrote in a note.
If yields move “materially” higher due to concerns over the fiscal outlook, however, stock markets would see a risk-off move, with tariff-sensitive consumer stocks losing ground, they said.
Treasury yields fell on Monday as polling data ahead of Tuesday’s US elections prompted some investors to pare the so-called Trump trades. Polls show Democratic nominee Kamala Harris and Trump are in a close race, with Harris having a slight edge nationally and in some swing states.
If Harris wins the White House and Congress is divided, tariff-exposed consumer equities and renewables could outperform in the short term, the Morgan Stanley team wrote. In such a scenario, a fall in rates could also benefit housing-sensitive consumer stocks while financials, industrials and commodity-sensitive industries could underperform.
Mislav Matejka’s team at JPMorgan is also telling stock investors to keep a close eye at the bond market.
Investor positioning in equities is higher than in 2016, the strategists wrote, with a Trump win and positive market reaction widely expected.
“While equities could have a knee-jerk bounce on a Trump win, in sympathy with the 2016 template, the sustainability of the up move is likely to depend on the magnitude of the bond yields’ response,” the strategists wrote in a note.
If Harris wins, uncertainty over the path of corporate taxes would increase near term, though in the medium term equities might find support from the reduced risk of tariffs, they said.
This article was provided by Bloomberg News.