As the US presidential election approaches in November, analysts expect stock market volatility to rise due to policy uncertainty.
The investment bank advises against making material changes to strategic portfolio allocations based solely on elections, but recommends considering election risk management in the near term. “We expect stock market volatility to rise – as it typically does – as Election Day approaches due to policy uncertainty,” analysts note.
The bank offers two baskets of stocks that could benefit from the most likely election outcomes: Trump winning the Republican convention or Biden winning the split in Congress.
These arrows serve as a guide to express tactical views on elections and hedge election-related risks.
In the Trump administration, the focus will be on trade relations, increasing tariffs, and easing regulations. Higher tariffs could benefit domestic producers in sectors such as steel, wood, aluminum and solar cells.
In addition, the traditional energy and financial sectors may benefit from a more relaxed regulatory environment. “Less stringent antitrust enforcement could lead to increased merger and acquisition activity,” analysts explain.
They believe a second Biden administration is likely to continue the status quo, with the possibility of higher corporate taxes to fund fiscal spending if Democrats take over both chambers of Congress, although this scenario is considered low probability.
The bank says that Biden's victory in light of a divided Congress will depend on executive actions and regulatory oversight of climate change initiatives. Recent US Supreme Court decisions limiting the regulatory power of federal agencies could limit the scope of Biden's implementation without Congress' support.
The bank warns investors against positioning portfolios based on specific election results due to high uncertainty. Instead, they recommend flexibility in adjusting portfolios as new information emerges.