As the United States approaches another presidential election, it is natural for investors to be curious about how the outcome will impact the markets.
However, Morgan Stanley analysts point out that the business cycle, not the election, will have a more significant impact on market behavior.
While election years are often filled with speculation and predictions, the historical impact of elections on markets is less clear, Morgan Stanley said in a note to clients on Monday.
“Our multi-asset strategy team’s study of the period leading up to previous elections shows no clear pattern of market behavior in election years, even when examining different electoral and economic conditions,” the bank said.
The uncertainty surrounding the election, especially given the polarization of the electoral process, is said to further reduce the likelihood that investors will base their near-term strategies solely on electoral outcomes.
In particular, Morgan Stanley highlights that certain sectors may see more pronounced effects after the election based on the different policies of the two major parties.
For example, they point out that the energy and telecom sectors may struggle under the Democrats’ plan to extend tax breaks, while the clean tech sector may benefit from sustainable allocations under the Inflation Reduction Act.
In addition, the bank says the US Treasury yield curve and the US dollar are also areas to watch. For example, a Republican victory could lead to higher tariffs, which could lead to a steeper yield curve as shorter-dated bond yields fall.
The U.S. dollar, often considered a safe haven, could strengthen if former President Trump wins, Morgan Stanley said, despite his criticism of the strong greenback.
They believe this could be due to potential tariffs and increased geopolitical uncertainty, which could lead to more accommodative policies by central banks abroad.
While the election is dominating the headlines, Morgan Stanley believes business cycle dynamics will play a more important role in shaping market trends in the coming months.