Investing.com – As the U.S. prepares for the expected 2024 elections, BCA Research advises investors to take precautions and reduce risks in their portfolios.
The financial landscape looks uncertain due to the economic slowdown, geopolitical tensions and the potential for market volatility in the run-up to November.
Although the BCA gives Democrats a slight edge, the margin is narrow, and the potential for market turmoil remains high. Investors should proceed with caution and take a defensive stance to mitigate potential risks.
The most prominent concern highlighted by BCA Research is the imminent threat of an economic recession.
“Unemployment rates are rising, triggering the so-called ‘share rule’, which signals that a recession is coming,” analysts said.
While unemployment rates remain manageable in key states, an unexpected spike could create a cascading effect, leading to a massive sell-off in the market.
The U.S. stock market, which typically peaks six months before a recession, could see a sharp correction as early as September or October.
This mirrors a pattern seen during previous downturns, such as the 2008 financial crisis, when the economic shock coincided with a major stock market crash.
“At the moment, we favor US assets over global, US bonds over equities, defensive equity sectors over cyclicals, healthcare over other defensive sectors, and aerospace/defense over other cyclicals,” the analysts said.
The reason for this is straightforward: during economic downturns, industries that provide essential services or are supported by government spending generally perform more strongly.
Moreover, as recessionary pressures mount, US bonds are likely to outperform stocks, making fixed income assets the safer option for preserving capital.
Beyond economic concerns, geopolitical instability adds another layer of uncertainty. The BCA report highlights how rising tensions with both Russia and China are impacting global markets.
Russia in particular poses a unique risk because it could take economic retaliatory measures, such as restricting oil or uranium exports. Such moves could send shockwaves through global energy markets, sending prices soaring and adding further pressure to an already fragile global economy.
China, which is struggling with a slowing economy, poses structural risks that could reverberate throughout the global financial system. Investors should pay attention to these geopolitical flashpoints, as any escalation in these areas could further destabilize markets.
These concerns are heightened by the potential for so-called “October surprises.” The BCA identifies several potential disruptions that could emerge just before the election.
These events include a sharp rise in unemployment rates, an outbreak of social unrest, or even a major geopolitical event such as a border crisis or a terrorist attack.
Each of these scenarios has the potential to change voter sentiment and impact the market, making it imperative for investors to anticipate and respond to these possibilities.
BCA stressed that any of these events, especially if they surprise the market, could push stock volatility to new highs.
The uncertainty surrounding the election results themselves also contributes to market volatility.
According to the Center for Primary Election Research’s forecast, the Democrats have a 55% chance of winning the White House, but the race is not yet decided.
A Republican victory would likely lead to a very different set of outcomes, including major tax cuts, significant tariff increases, significant restrictions on immigration, and an increased likelihood of a regional war in the Middle East.
On the other hand, a Democratic victory would bring gridlock, modest tax increases, marginal fiscal improvement, a nuclear threat with Russia, and alliance building against China. Europe, Canada, Mexico, and Japan would see their political risk premiums fall not in absolute terms but relative to a Trump victory.
Amid this political uncertainty, BCA urges investors to prepare for increased market volatility regardless of the election outcome.
Since neither side has a clear advantage, the risk of unexpected disruptions—whether economic, political, or geopolitical—remains a serious concern. So reducing risk is a smart strategy.