AGF CEO unpacks near-term volatility and long-term prospects in any outcome
We probably won’t know the results of today’s election by tomorrow morning. If polls are to be believed this will be one of the most close-run elections in modern history. That could mean we won’t know whether Kamala Harris or Donald Trump are elected President before the end of the week, or maybe even for the next several weeks. Given the fact that markets hate uncertainty, we may be in for a volatile ride as investors digest the results.
Kevin McCreadie, CEO and CIO of AGF Management Ltd. unpacked the various sources of uncertainty and volatility out there on the market now. He outlined how markets may react in the immediate term and how they’ll take onboard the eventual news of a firm outcome in the election. He unpacked some of why we haven’t seen too much volatility going into election day, and outlined how investors may want to be positioned to ride out the immediate term impacts.
“The odds of not knowing winner on Wednesday morning are pretty high and markets don’t like uncertainty,” McCreadie says. “The longer that goes the more volatility. So, we look at things like having a little more cash. Your fixed income position actually will help you in the first instance. If you get that equity market volatility you probably get a rally in bonds as people flock to perceived safety. So that'll help you, as well as your cash which will offset some of that.”
McCreadie adds that his firm’s funds use an anti-beta hedging strategy to provide different returns in moments like these. He sees value there given the potential for an election that sees contested results and possible recounts, much like the Bush-Gore election of 2000.
Despite the likelihood of post-volatility election, there has been a notable lack of election-driven volatility going into the election, at least since Kamala Harris entered the race. McCreadie says that is more likely a result of investors watching betting markets rather than polls. Betting markets have a much higher likelihood of a Trump victory priced in.
As investors price in a Trump victory, McCreadie believes they are also pricing in the prospect of a similar rally to his victory in 2016. While markets sold off overnight, they rallied in the morning as investors saw a sweep by a very pro-business party. Today, however, the US economy is in a slowdown and the US stock market is very expensive.
McCreadie believes the market is looking at the wrong analogy in its positioning right now. Given the high valuations in US stocks and the already ongoing slowdown in corporate earnings and GDP growth, he agrees that any onset of volatility could result in a drawdown. The longer the uncertainty lasts, the bigger the drawdown will be.
Another source of volatility may be the Trump campaign’s apparent readiness to contest the results of the election. Given Trump’s own legal liabilities should he fail to win, McCreadie says he’s likely going to call the election ‘rigged’ in almost any outcome. The tighter the election results are, though, the more impact those cries will have on markets.
Whenever the results do come, however, there will be an outcome. Looking longer-term McCreadie sees four broad outcomes likely. The first is that Trump wins while the Democrats retain control of either the House or Senate. He sees the impact of that result as somewhat muted given legislative deadlock. Trump will be limited to executive orders on immigration and tariffs, which may result in higher inflation and higher rates. That could be somewhat damaging for fixed income. McCreadie says that even if Republicans sweep the House and Senate along with the White House, the nature of US legislative deadlock will likely produce similar economic outcomes.
If Harris wins, McCreadie sees less inflationary impacts as both tariffs and immigration curbs would be less severe. The result would likely be lower inflation and lower interest rates, improving the outlook for fixed income. However, the likely expiry of some Trump tax cuts and the prospect of corporate taxes going higher. That could be more broadly negative for equity markets.
As investors watch results roll in on Tuesday night and wait anxiously for a winner to be declared, McCreadie cautions against too much doom and gloom thinking. For all the bombast and hyperbole that has come with this election cycle, there will be a resolution.
“There will be a President sworn in on January 20th, this will get resolved,” McCreadie says. “This will get resolved, even if it doesn’t feel that way in the beginning. Reaction functions are sometimes the worst things you can do versus processing the information and seeing the path forward.”
