The financial sector, which is dominated by banks, generally does well in rising rate environments because financial institutions are able to earn higher spreads off customer deposits. Within the S&P 500, Financials led the way in October, with a 3% total return.
The worst performing sectors in the S&P 500 in October were Health Care, down 5%; Consumer Staples, down 3%; and Real Estate, down 3%. Stocks within these sectors tend to be more defensive and characterized by stable long-term cash flows. Like bonds, their valuations are adversely affected by upward movements in long-term rates.
Election Day is almost here
As we write, the election is only two full trading days away. We may know by Wednesday, November 6 who will be the next President.
Depending on how close the results are in swing states, we also may not know the winner, which presents a wide range of potentially risky scenarios. An argument could be made that recent strength in gold somewhat reflects investor positioning for the tail risk of civil unrest in the U.S. that could be associated with an inconclusive or questionable outcome. Such a scenario could be very destabilizing for markets.
Given that the stock market has responded favorably in response to improved perceptions of a Trump victory, it stands to reason that the market would continue to react favorably if he were to emerge the winner.
Conversely, a Harris victory would likely be interpreted as signaling a slower growth trajectory and more difficult operating environment for many companies.
Because a Harris victory would be seen as worse from a growth perspective, long-term bonds may rally if she wins as interest rates come down. The defensive sectors that underperformed in October as rates rose may outperform in this scenario.
Who will win?
Despite the recent reversal, Trump generally remains favored in prediction markets and polls. Early voting results in swing states seem to indicate a better relative showing of Republicans than Democrats versus 2020.
One important caveat is that Republicans have been more focused this time around on generating early votes. To some extent, the better relative performance could just represent a “pull forward” of votes that otherwise would have been cast on Election Day.
As we analyze the map along with state level prediction market indicators, the so-called “blue wall” states are clearly pivotal. These also seem to be the closest swing state races, with Trump likely to prevail in North Carolina, Arizona, Georgia and even Nevada.
Assuming Trump wins in the four sunbelt states mentioned above, he just needs to win one of the three blue wall states to clear 270 electoral college votes. (Trump can actually afford to lose Nevada if he wins in Pennsylvania, Michigan or Wisconsin, which renders Nevada irrelevant in most scenarios.)
Even if we concede Michigan to Harris, if we assume Harris and Trump each have an approximately 50% chance of victory in Pennsylvania and Wisconsin, the odds of Harris winning both states are only 25%. This (perhaps oversimplified) math implies a 75% chance of victory for Trump.
Of course, anything is possible, including upset victories in any of the states mentioned. Perceptions around the candidates’ chances in any given state are largely driven by polling, which is of uncertain value. That being said, we tend to concur with prediction markets that the overall odds favor a Trump win.
As we recently communicated to subscribers, long-term investors should not get too distracted by the ebb and flow of the political cycle. Our Model Portfolio selections are not predicated on any particular political outcome. The focus should be on staying invested in strong businesses that will succeed—independent of the political backdrop.
From the standpoint of inflation, neither candidate has been especially focused on what could be the main reason we will continue to experience monetary debasement in the years ahead—excessive spending on entitlements that creates persistent deficits and ever growing public debt burdens.
