Wall Street Shuns Risk Before Coin-Toss Election: Markets Wrap

(Bloomberg) — Stocks failed to gain traction, bonds rose and the dollar retreated, with polls continuing to depict a tight race in the US presidential election ahead of the Federal Reserve decision.

In the run-up to the hotly contested election, options markets show Wall Street staying defensive, with a flurry of polls underscoring voters are narrowly split between Donald Trump and Kamala Harris. For many, that means volatility ahead as the likelihood of a disputed result could drag the vote count out for weeks or even months. Equities edged lower. Treasury yields fell across the curve and dollar dropped the most since August.

The other positioning challenge is the number of additional catalysts surrounding the vote that are likely to move the market. Election Day will quickly be followed on Thursday by the Fed decision and Jerome Powell’s press conference, where he’ll give details on the central bank’s interest-rate path. And a big chunk of US companies are still due to report their earnings.

“Normally, the Fed rate announcement would dominate the week’s discussion, but this isn’t just any week,” said Chris Larkin at E*Trade from Morgan Stanley. “Traders and investors who have been waiting for the outcome of the election have to prepare themselves for the possibility of a delayed outcome, and the potential impact of that uncertainty on the markets.”

Regarding equity market performance, the S&P 500 tends to see positive returns to close out the year after Election Day, according to Bespoke Investment Group. For all years since 1990, the median gain has been 3.3% with positive returns 25 out of 34 times. For election years, performance has tended to be modestly stronger with a median gain of 3.9% and gains six out of eight times.

The S&P 500 fell 0.2%. The Nasdaq 100 dropped 0.3%. The Dow Jones Industrial Average slid 0.6%.

Treasury 10-year yields declined eight basis points to 4.30%. The Bloomberg Dollar Spot Index slipped 0.4%. Bitcoin fell 2.2% to $67,568.07. Oil advanced after OPEC+ agreed to push back its December production increase by one month and tensions heightened in the Middle East.

Equity options volatility climbed through most of October even as the market’s swings were muted, in anticipation of not just the upcoming election but also earnings season and a Fed decision.

From stocks and Treasuries to currencies and commodities, rarely has anxiety been as pronounced at this point of the cycle. In one example, a gauge of cross-asset risk kept by Bank of America Corp. jumped to the highest point of any pre-election week outside of the financial crisis.

Commodity trading advisers, or CTAs, are expected to sell US and global stocks no matter which direction the market goes, according to the Goldman Sachs Group Inc. trading desk. 

“Our models assume that over the week CTAs are going to be material sellers in any market scenario,” it said.

JPMorgan Chase & Co. strategist Dubravko Lakos-Bujas expects US equities will climb into the final stretch of 2024 once the results of the US presidential election are declared, particularly if the outcome is political gridlock.

“Under either gridlock scenario, we think equities reprice higher as we clear the uncertainty, volatility decreases and hedges unwind, with investors refocusing on the Federal Reserve at a time when the economy and corporate earnings remain resilient,” he wrote Monday in a note to clients.

The S&P 500 Index can keep climbing into the final stretch of 2024, with a 5% gain from here not out of the question, as investors exhale after the US presidential election passes and year-end FOMO kicks in, according to Morgan Stanley’s Mike Wilson. 

But with no clear catalysts in sight, that enthusiasm is likely to fade as the calendar turns to 2025, the strategist warns. 

To Dan Wantrobski at Janney Montgomery Scott, US equities remain largely in consolidation mode ahead of this potentially historic week. Investors should expect “more choppy trading in sessions ahead, he noted.

“Depending on how things develop, the markets themselves are teed up for either new highs (the primary trend is still bullish) or bigger drawdowns (overbought conditions remain, with some recent support levels broken),” Wantrobski said.

US equity markets performed relatively well during the past month in comparison to steeper declines during the period just ahead of past presidential races. That suggests optimism about the economy and further Fed rate cuts is outweighing worry about the US election, according to strategists at Citigroup Inc.

“Of course, the US election will play a prominent role in moving financial markets around this week,” said Anthony Saglimbene at Ameriprise. “However, a Federal Reserve policy decision on Wednesday, some light economic releases throughout the week, and roughly 20% of the S&P 500 scheduled to report third quarter results should also have their fair share of sway on directing stock traffic.”

With both US presidential candidates at a “dead heat” heading into next week’s election, markets are bracing for a result that could lead to a wide range of policy outcomes. Yet, it is notable that, since 1933, equities have almost always risen by double-digits by the end of a president’s term, regardless of their party affiliatio according to Seema Shah at Principal Asset Management.

“Investors should take caution. Those who allow their political opinions to cloud their investing decisions could miss out on the potential rewards that come with staying invested in the market over the long-term,” she noted.

Against the uncertain electoral backdrop, it might make sense to look at areas that have bipartisan support rather than industries that benefit from one party or the other, according to Scott Helfstein at Global X.

“For example, themes tied to U.S. competitiveness like infrastructure, defense technology, and nuclear energy are central to both party platforms,” he said. “Private investment in areas like AI, data centers, and robotics is likely to remain elevated as US companies look to sustain high margins in an environment with either higher tariffs or taxes.”

Financial markets are starting their final sprint into year-end and conditions are aligning for the normal seasonal rally, though one is far from assured, according to Jason Draho at UBS Global Wealth Management.

“The election should be a risk-clearing event, while economic fundamentals, policy, and investor positioning lean in favor of markets grinding higher,” he said. “For equities, this could also mean a further broadening out of performance that began earlier in the fall. Even if such a year-end rally doesn’t materialize, these conditions, along with the AI theme, give us confidence that the markets will move higher over the next year.”

Corporate Highlights:

• Berkshire Hathaway Inc.’s cash pile reached $325.2 billion in the third quarter, a record for the conglomerate, as Warren Buffett continued to refrain from major acquisitions while trimming some of his most significant equity stakes.
• Berkshire once again cut its holdings in Apple Inc., the Omaha, Nebraska-based company said Saturday in a statement. Its stake in the iPhone maker was valued at $69.9 billion at the end of the quarter, down from $84.2 billion in the second quarter, indicating that Berkshire cut its stake by about 25%.

• The company will replace rival Intel Corp. in the 128-year-old Dow Jones Industrial Average prior to the start of trading on Nov. 8, S&P Dow Jones Indices said in a statement late Friday.

Key events this week:

• China Caixin Services PMI, Tuesday
• US ISM services, Tuesday
• US presidential election, Tuesday
• Eurozone HCOB Services PMI, PPI, Wednesday
• China trade, forex reserves, Thursday
• UK BOE rate decision, Thursday
• US Fed rate decision, Thursday
• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2% as of 3:33 p.m. New York time
• The Nasdaq 100 fell 0.3%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World Index fell 0.1%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro rose 0.4% to $1.0877
• The British pound rose 0.2% to $1.2954
• The Japanese yen rose 0.6% to 152.14 per dollar

Cryptocurrencies

• Bitcoin fell 2.2% to $67,568.07
• Ether fell 1.8% to $2,424.82

Bonds

• The yield on 10-year Treasuries declined eight basis points to 4.30%
• Germany’s 10-year yield declined one basis point to 2.39%
• Britain’s 10-year yield advanced one basis point to 4.46%

Commodities

• West Texas Intermediate crude rose 3.2% to $71.69 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.

©2024 Bloomberg L.P.