On another trading day, American voters will elect their next president, which may determine the direction of the US economy for the next four years.
Traders are discussing various possibilities, constantly checking the latest polls and trends in the election betting market to predict whether Republican Trump or Democrat Harris is leading, and what this means for their asset allocation. In some markets, people speculate that Wall Street is betting on Trump. But when it comes to actually investing funds in the stock market based on this, the situation is unusually calm.
Investment professionals know that predicting unexpected wealth before a winner appears is crucial. The problem is that the competition in this election is very fierce, which makes it difficult for many people to bear the risk of prediction errors.
Eric Diton, President and Managing Director of Wealth Alliance, said in an interview, "We don't build positions in advance for election results because it's like flipping a coin. Placing bets doesn't make sense
Most traders believe that there will be volatility this week, and the volatility may be significant, as controversial results could potentially delay the voting results for weeks or even months. This explains why the Chicago Board Options Exchange Volatility Index (VIX) has climbed above 20 in the past four trading days, a level that typically indicates an increase in stock market pressure. That's also why investors are not so eager to pick winners and losers based on who they believe will become the next president of the United States.
Dave Lutz, a stock sales trader and macro strategist at JonesTrading, said, "The past polls have been wrong. It's impossible to see who will win
Holding cash
Another position challenge is the quantity of additional catalysts surrounding voting that may affect market trends. On Thursday after election day, the Federal Reserve will announce its interest rate decision, and Federal Reserve Chairman Powell will then hold a press conference to provide a detailed introduction to the Fed's interest rate path. In addition, a large number of American companies will continue to release their financial reports, and chip giant Nvidia (NVDA. US) is expected to announce its financial report on November 20th Eastern Time.
This explains why Lutz did not specifically build a position for the election. On the contrary, his suggestion is to 'hold some cash' in order to allocate when any short-term opportunity arises, such as when a winner appears, individual stocks or industries may react.
I want to say that many investors' positions are exactly like this, "Lutz said.
Taking Robert Schein, Chief Investment Officer of Blanke Schein Wealth Management, as an example, he stated that he had increased his cash equivalents holdings from the usual 5% to 10% prior to the election. His strategy is to be prepared to buy assets in large quantities at any time when the outcome inevitably triggers fluctuations in at least some of the market.
Anwiti Bahuguna, Chief Investment Officer of Global Asset Allocation at Northern Trust Asset Management, said in an interview, "Investors need to consider the lingering election risk. Due to strong speculation, traders are now unable to even build positions, and they do not know which policy proposals of the two candidates will be passed in Congress
Perhaps unsurprisingly, the market looks very tight. The S&P 500 index is approaching its historical high, while the VIX index has exceeded 20. The last time S&P reached such a high level under this so-called "panic index" was during the outbreak of COVID-19 in March 2021. At the same time, hedge funds are betting on larger range price fluctuations. Data released earlier this month by the US Commodity Futures Trading Commission (CFTC) showed that large speculators net long VIX index futures for the first time since January 2019.
Asym 500 founder Rocky Fishman stated that options market data shows that traders are still on the defensive, using valuations above normal levels to prevent rapid selling. He added that this is partly driven by a series of reports and data in the coming days, including the Federal Reserve's interest rate decision, corporate earnings reports, and inflation data.
Fishman said, "Although the market clearly expects Wednesday to be a volatile day when we will know the election results, this period is by no means calm
Ignore election noise
Insiders within the company are also unwilling to get involved in the stock market. According to data compiled by the Washington Service, only 261 corporate executives purchased stocks of their own companies in October, the lowest level since at least 2017, pushing the buy sell ratio to the second lowest level since spring 2021.
Some Wall Street professionals suggest that investors seeking safer stock investments should ignore election noise.
Northern Trust's Bahuguna said, "The election is a very low probability event, so we fully expect a period of turbulence next month. However, what ultimately supports the stock market are decent corporate profits, strong economic growth, falling inflation, and the Federal Reserve's interest rate cuts
Northern Trust increases its holdings of US stocks based on the resilient US economy, while reducing its holdings of bonds to hedge against inflation risks. The company also increased its holdings of physical assets, including infrastructure, natural resources, and real estate, in order to protect its investment portfolio from future turbulence while the job market remains tight and economic growth remains strong.
Others are concerned about corporate profitability, especially the improvement of balance sheet quality, as the Federal Reserve has just begun to cut interest rates, which are still at a high level.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, said, "Interest rates are still in a restricted state, and there is a greater possibility of increased volatility before the end of the year, so it is appropriate to adopt a more conservative approach
The key to all of this is that in an election without a clear winner, the safest course of action for investors is to be patient and wait. This is what Wall Street preaches - at least for now.
Mark Luscini, Chief Investment Strategist at Janney Montgomery Scott, said, "If this is a clearer judgment, it will be included in the market and there is almost nothing left to exploit. But in such a tense situation, it is better to look to the future and continue to think about the macroeconomic situation 6 to 18 months from now, rather than just focusing on the results of that day