US Strategy: Election Update – Just the Facts

• With less than a week to the US Presidential & Congressional election, we provide a quick update on recent market price action and what it may be saying about election expectations.
• In recent weeks, strong equity performance and rising UST yields have coincided with betting markets pointing to a Trump victory (and presumably a red wave). However, stronger-than-expected economic data on the back of the Fed’s 50 bp rate cut is likely contributing to the momentum.
• Given the myriad of unknowns on the back of the election and the time it will take for any policy change to work through earnings/fundamentals, we refrain from providing specific trade recommendations premised on the outcome. Markets have reacted with risk on sentiment in the most recent election cycles and post the 2004 cycle, which has credit market valuations much closer to current levels than in 2016 or 2020.
• Instead of focusing on the outcome of the election, we focus on what we know, specifically that cash on the sidelines and a Fed inclined to cut rates, at least in the short-term, create significant support for credit markets. This leaves us sticking with a neutral allocation to US IG and HY as attractive carry leaves us hesitant to cut risk while tight spreads limit appetite to add.
• Finally, but not least, the potential for a very close and contentious election outcome is frequently highlighted as a key risk for the market in the near-term. We would not be surprised to see a short-term risk off move in the event of a contentious election outcome and such a move could be exacerbated if Moody’s takes the opportunity to downgrade the US’s credit rating from Aaa.

With less than a week to the US Presidential & Congressional election, we provide a quick status check of recent market price action to gauge expected election outcomes, highlight key dates to keep in mind post November 5 and look back at post-election market performance in 2020, 2016 and 2004.

In recent weeks, the Trump campaign has appeared to gain momentum, with a range of betting markets and polls shifting expectations to a Trump victory. PredictIt contracts show Trump pulling well ahead of Harris in betting markets in early October, while Larry Sabato’s Crystal Ball makes a case for a still very tight race. Market price action has also favored the conventional Trump trades, with the USD, equities and UST yields all climbing higher over the course of the month. However, we find it difficult to discern how much of the move, especially in rates, is related to the market expecting a Republican sweep and what is attributable to the string of better-than-expected economic data reported over the past month.