Time is running fast. There is only one week left until the presidential election in the US. Although the market participants seem to me like pricing in a blue wave and of course in combination with Joe Biden as the winner, I would like to give a quick overview about how I would position myself in front of election night.
First of all I would like to make clear that the overall outcome will be market friendly.
With a little delay till approx the end of 2020, the beginning of the next year should become very positive, if we’re able to deal with the virus.
Of course the first days after the election could be shaky and some surge in volatility is also likely but that would be quite normal. The willingness by the FED, to support the market as long as needed, and on the other hand, the high likelihood of an additional stimulus package in January give the broader market a lot of upside potential.
So summarized with the beginning of 2021 I’m extremely bullish on equities. (Here you can read the arguments for this case)
But we’re still in 2020 and have the election right in front of us.
Here is a great graphic by JP Morgan about the beneficiary sectors if Biden wins the election, what also seems to be currently already priced into the market.
Here you can see that Alternative energy, infrastructure, chinese equities,healthcare but also government bond yields would be maximum beneficiaries of a blue wave.
Therefore you can easily identify that these sectors almost perfectly replicate the probability of a Biden presidency.
With a “more stable” and more predictable administration we could see rising bond yields again, even in a low interest rate environment. With a great likelihood of a blue wave we already see rising bond yields at the moment. With that said a lot of news is already priced in and the surprise factor after the official outcome shouldn’t be that kind of overwhelming if Biden becomes president.
But as I already mentioned in an article, two weeks before, I still believe in a Trump win, because of alternative facts and the strong parallels to the 2016 election.
Therefore I think the way to go is long the banking sector as well as long the defense sector.
In Addition to that I would attach another short on the chinese broader stock market.
When it comes to currency I would make it a simple short term case. Trump win leads to a strong USD, while a Biden win leads to a weak USD.
Another case would be a tight race until the end and a possible contesting of the official election result by the Trump administration. This of course would lead to even more uncertainty which usually leads to more volatility and in this combination most likely shrinking equity prices in the short term.
My idea is that these “trades” would be more short term bets which shouldn’t last longer than a few days after the official election outcome.
But please don’t get me wrong. This kind of setup would be a direct bet on the outcome of the election next week and has nothing to do with long term investing, which certainly will be successful in the long term.