Wall Street strategists say their meetings with portfolio managers have taken a dark turn lately. All but gone are investors’ fears of a hard landing, replaced by a deeper anxiety that things could go very badly around Election Day.
Investors are not just concerned about their investment portfolios or retirement funds. They’re worried about democracy. As in … will it hold up if the result of the election between Donald Trump and Vice President Kamala Harris is contested?
“The general consensus is that, one, it will take time to find the winner — so we might have to wait for weeks until the many contests and court challenges have played out,” Joachim Klement, the head of investment strategy at the investment bank Liberum, told DealBook. “And two, no matter who wins, there will be civil unrest.”
Klement spoke with DealBook shortly after wrapping up a multicity investor roadshow. He said investors were worried about violence: Intelligence agencies have issued bulletins warning of possible election-related violence, and voters, too, are on high alert, some polls show.
Investor pessimism may reflect the race’s increasingly negative tone. One of Trump’s former chiefs of staff said Trump met the definition of a fascist. And Harris called him a “petty tyrant.”
In turn, Trump punctuates his rallies with a litany of grievances and has made ominous threats to deploy the military against “radical left lunatics” and “the enemies from within.”
Language like that may be stoking memories of the last presidential race, which culminated in the deadly Capitol riot on Jan. 6, 2021, and fears that the peaceful transition of power is far from certain.
Despite the political turmoil, investors should be feeling pretty good. The S&P 500 is in the third year of a bull market (though there are more signs of worry in the bond market). The economy is growing. Inflation is down considerably, and the unemployment rate is low, at 4.1 percent.
C.E.O.s have mostly been downplaying analysts’ questions about political uncertainty after the votes are counted.
Gaining an edge ahead of a new administration is a tried-and-true investment strategy. Some big investors, like hedge funds, game out even the most extreme risks to find a profitable trade. But more conservative fund managers — the so-called sleepy money with long investment horizons — tend to focus on macro questions: How would a Trump policy of, say, lower taxes but higher tariffs affect corporate profits? Or how would a Harris administration’s policies affect the energy sector?
That said, the investment pros who spoke with DealBook — some of whom also advised investors before and after deeply divided presidential contests like Bush-Gore, Clinton-Trump and Trump-Biden — said the mood seemed more anxious this election cycle.
David Bahnsen, the founder and chief investment officer of the Bahnsen Group, a wealth management firm, told DealBook that this time around “civil unrest” was a top-of-mind risk.
He added: “I’m not sure that that necessarily creates a big portfolio concern. It more just speaks to what is clearly a sort of growing schism in society, and so those things come up quite a bit.”
Timing is a big factor. In 2020, it took four days before The Associated Press declared Joe Biden the winner of the presidential race. The longer it takes to name a winner, the bigger the worry of social disorder.
Uncertainty over how long it might take is evident in investor meetings, said Lori Calvasina, the head of U.S. equity strategy at the investment bank RBC Capital Markets. When the subject turns to the election, she added, the tone often grows uncomfortable: “It’s like staring at the sun.”
“What investors want the most is a clean, clear outcome,” said Ed Mills, a managing director and Washington policy analyst at Raymond James.
“I was meeting with clients in New York and Boston this week, and that came up in almost every single conversation.”
— Bernhard Warner
IN CASE YOU MISSED IT
Job growth stalled in October. Employers added only 12,000 jobs, the Labor Department reported on Friday, which was significantly fewer than economists had forecast. The number, which was skewed by a strike at Boeing that began in mid-September and the impact of Hurricanes Milton and Helene, strengthened the case for another interest rate cut when Federal Reserve policymakers meet next week. It also provided political fodder for both Republicans and Democrats before Election Day.
Tech earnings painted a mixed picture on A.I. Microsoft and Meta saw sharp price drops that weighed on the wider market after they warned of more heavy spending on artificial intelligence, while share prices for Alphabet and Amazon ticked up after the companies reported strong sales in their cloud businesses.
Boeing’s striking workers will vote Monday on a new contract proposal. Employees rejected two earlier proposals to end a labor stoppage that began on Sept. 13 but the union has urged its members to back the revised deal, which has slightly improved terms. Separately, the plane maker plans to said it had broken up its diversity, equity and inclusion initiatives department.
Starbucks’s new C.E.O. outlined plans to start turning around the coffee giant. Brian Niccol said the changes would include trimming menu options and aiming to get drinks into a customer’s hands within four minutes. The coffee chain also said this week that corporate workers must be in the office at least three days per week from January, or face possible “separation.”
Gridlock isn’t always best for Wall Street
Just days before the election, any result still seems possible: The battle for the House is on a knife’s edge, Republicans have a slight edge to take the Senate and the presidential race is a tossup.
What are markets rooting for? The conventional wisdom is that the best possible outcome for stocks is a split outcome. Gridlock, the thinking goes, is a kind of stability. But that’s not the full story.
Looking at average S&P 500 returns since 1933, gains have been greater under a Democratic president with a split Congress than under a Republican president with a split Congress, according to RBC Capital Markets. A Republican sweep has coincided with greater returns than a Democratic sweep.
It’s not always the same answer. In the 2020 election, for example, some strategists saw a Democratic sweep as a potential profit driver because they thought a unified government could better aid the economic recovery from the pandemic. In a recent survey of analysts, most said a Republican sweep would be best for stocks, particularly in the energy and financial sectors.
Policies from both Harris and Trump could be negative for the stock market. A Harris win is seen as leading to more regulation and higher corporate taxes, while Trump vowed to stem immigration and increase tariffs, moves that could fuel higher inflation. “Since early this year our underlying election view has been that both candidate/party platforms are incrementally equity negative,” Scott Chronert, a strategist for Citigroup, wrote in a note to clients. A divided government could mean neither party’s plans fully come to fruition.
But gridlock can cause problems, too. The debt ceiling, for example, expires on Jan. 1. If Congress fails to pass a new one, it could cause a government shutdown, which would be negative for markets. Neither candidate has said much about how he or she plans to tackle the $36 trillion national debt mountain, despite repeated calls by Wall Street C.E.O.s, including Jamie Dimon, that it’s unsustainable for long-term growth. And many tax cuts enacted during Trump’s first term are set to expire in 2025.
Stocks have tended to rise regardless of which party controls the government. If you had invested $1,000 in the S&P 500 at the start of the Eisenhower administration in 1953, and stayed in only under Republican presidents, you would now have $30,000, according to an analysis by the financial services firm Carson Group. If you had invested the same amount only under Democratic presidents, you’d now have $60,000. But by far the best bet would have been to stay invested the whole time, in which case you’d have almost $1.7 million.
“What matters more is how the economy, profits, inflation and Fed policy all line up,” the analysts wrote, “not who is in the White House.”
Quiz: stock performance by president
The president under which the S&P 500 has performed best since World War II?
Was it:
-
Ronald Reagan
-
Donald Trump
-
Bill Clinton
-
Barack Obama
The answer is Clinton. The S&P 500 gained 17 percent on an annualized basis, according to Deutsche Bank. Trump came in second with a 16 percent annualized return, and Obama and Reagan tied for third with a 15 percent annualized return.
Thanks for reading! We’ll see you Monday.
We’d like your feedback. Please email thoughts and suggestions to dealbook@nytimes.com.
The post Fears of Civil Unrest Stalk the Markets appeared first on New York Times.
