Elections

Investors should prepare for economic data to weaken even as policy uncertainty and geopolitical risk skyrocket ahead of the US election.

Our quant models suggest Democrats are still slightly favored for the White House. Our Senate model favors Republican control, though Montana and Ohio are the weak links that could deliver Democrats a de facto Senate majority in the event they keep the White House. But there are still six months before the vote. An oil shock from the Middle East or other negative economic news would force a major change to these models.

In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.

Investors around Europe and North America are concerned that the stock market is increasingly overbought and vulnerable to exogenous risks. We agree and have good reasons to fear that festering geopolitical risks and the US election season will deal negative surprises.

The US Presidential election is eight months away. In this report, we will be looking at what is left of President Biden’s political capital and his room for actions in the next few months which may include market-negative actions such as the recently announced investigation into Apple.

Democrats are still slightly favored for reelection as the incumbent party is presiding over a growing economy. However, Biden’s strong showing in the primary election is not lifting his popular approval yet, and that is a worrying sign. Policy uncertainty should rise sharply, which is marginally negative for the stock market.