© Reuters. The Wall Street sign is pictured on the New York Stock Exchange (NYSE) in the New York borough of Manhattan
By David Randall and Saqib Iqbal Ahmed
NEW YORK (Reuters) – Investors gear their portfolios for market moves ahead of the US presidential election as election season shifts into higher gear with the Democratic National Convention next week.
While elections have been a big part of investor radar this year, their impact on the markets has pushed the coronavirus pandemic and unprecedented stimulus from US policy into the background.
That could change in the coming weeks, investors said. Some are increasing their cash positions or betting on volatility flare-ups as they keep an eye on a number of outcomes, including the possibility that the competition between President Donald Trump and alleged Democratic candidate Joe Biden will lead to an outcome that is not immediately certain or not likely to be controversial.
"There are many reasons to believe that the election result will be worked out," said Lamar Villere, portfolio manager at Villere & Co. "It will show the cracks in a market that has been priced for perfection."
Villere's company has increased its liquidity holdings up to 20% of its assets to hedge against election volatility in a stock market that some say has high value – the S&P 500 has moved from its year lows recovered by more than 50%, it trades with the highest forward price / earnings ratio in around two decades.
Some investors believe that market developments over the next few months could indicate which candidate will triumph in November.
The incumbent president tended to win the White House when the S&P 500 index rose in the three months leading up to the election, 1930 data from TD Securities showed.
That could be bad news for Trump. While the index is up about 3% this month, according to data from BofA Global Research, August begins with the historically weakest three-month part of the year for stocks, with the average historical return at around 0%.
At the same time, no incumbent got a second term in the middle of a recession, wrote TD Securities.
Biden leads Trump by 8 percentage points, according to a Reuters / Ipsos poll released Wednesday after Biden selected U.S. Senator Kamala Harris as his fellow campaigner.
A Biden win – as well as a possible Democratic contest with the House and Senate – could threaten Trump-endorsed and broadly Wall Street-favored policies, including lower corporate tax rates and fewer regulations, analysts said.
"The full impact of a future presidency in Biden could primarily unsettle the markets," Oxford Economics analysts said in a recent statement.
A proposed increase in the corporate tax rate to 28% could cut S&P 500 profits by about 5.5% in 2021, cut capital expenditures by about $ 50 billion, and reduce share buybacks by $ 100 billion, according to JPMorgan to lead.
At the same time, a Biden administration would likely move away from Trump's trade tariffs in Europe and China and help international and emerging markets outperform US stocks in the coming year, said Stuart Katz, chief investment officer of Robertson Stephens Wealth Management.
At least one of Biden's key directives – an increase in infrastructure spending by $ 2 trillion – could further weigh on the already weakened dollar, Oxford Economics said.
A re-election of Trump could allay concerns about higher taxes but re-create fears of US-China trade tensions, said Stephen Innes, chief global market strategist at AxiCorp.
A second term for Trump could also be positive for oil and gas companies, which could benefit from further easing of Obama-era regulations, Innes said.
Investors should also prepare for the possibility that the president may cast doubts about the correctness of the vote or withdraw from the race altogether, Joseph Amato, CIO for stocks at Neuberger Berman, wrote in a recent statement.
Trump escalated fears of a competitive election in a tweet in late July, suggesting postponing the election until people can "vote properly, safely and securely".
"The further behind he is in the polls, the more provocative his decision-making could be," wrote Amato.