Written by Divya Chaudhary and Mahnaz Yasmin
U.S. stock markets will remain volatile ahead of November’s presidential election, but the candidates’ policies should take priority over responding to “inflammatory” rhetoric from their political parties, JPMorgan’s chief investment officer said Tuesday.
“There’s a Republican trade and there’s a Democrat trade,” Richard Madigan, chief investment officer at JPMorgan Private Bank, told the Reuters Global Markets Forum when asked if he saw signs of a “Trump trade” in the market. “But it’s based on themes.”
“Their policy positions are very different, but both appear to be heading down a path that will lead to higher Treasury issuances and fiscal deficits,” which could exacerbate inflation and bond markets, he said.
The Trump trade, based on expectations that Republican nominee Donald Trump’s tax policies would boost corporate profits while undermining the long-term health of the nation’s budget, gained ground after Democratic President Joe Biden’s disastrous televised debate last month.
Wall Street got off to a strong start to the week after Biden dropped out of the race and endorsed Vice President Kamala Harris for the November election on Sunday, sending investors back into large-cap growth stocks and curbing a recent rally in small-cap stocks. Additionally, U.S. government bond investors unwound some positions that had been executed on hopes of a second Trump presidency.
Madigan said the company was not ready to generate the kind of huge returns it has already generated so far this year, adding that JPMorgan Private Bank had reversed its “over-invested” position in stocks when the benchmark index hit 5,600 earlier this month.
But more important than the outcome of the U.S. presidential race, Madigan said, is “how we see the distribution of Congress. If we end up with a sweep of either candidate, they focus more on the political narrative, because you can actually get action out of it, it’s not just words anymore.”
The US Senate is now narrowly controlled by Democrats, while the House of Representatives is now narrowly controlled by Republicans.
Profits among big tech companies and the so-called “Magnificent Seven” companies have continued to outperform, while smaller-cap companies are struggling with expensive debt and low profits and margins, Madigan said.
However, he expects more volatility over the next few months due to valuations and political headlines.
“If I didn’t think I was playing for higher short-term returns in the stock market and more volatility, I could have a very clear view of default risk and returns,” Madigan said. He said he was “overweight” high-yield debt in the U.S., Europe and emerging markets.
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