With the US Presidential elections scheduled for next month, November 3, having an election trading strategy is becoming a hot button topic.
As Darren Winters points out, a contested election is featuring on investors’ radar, with 60% of investors surveyed of the opinion that the election result could be contested, according to BoA Global Fund Manager Survey.
Formulating an election trading strategy is going to be tricky in the pending election
Bearing in mind that one of the likely scenarios is a contested election, which, if it plays out, would represent maximum uncertainty for investors.
But mapping out all the likely election outcomes, then deciding what action you would take in each scenario could help investors to clear the fog and draw up an election trading strategy.
Your election trading strategy is your trading plan, which should help you make thought-out decisions with a cool head
After all, nobody wants to be a rabbit caught in the headlights, frozen with fear then fleeing positions, which often leads to locking in huge losses.
So, here is BoA Global Fund Manager’s general tips for trading elections.
- If you are a trader short term investor, buy political dips;
- For an investment, watch the first 200 days;
- Don’t touch the core portfolio.
With the above general election trading tips in mind, Darren Winters looks at four likely election scenarios to formulate an election trading strategy
Scenario 1, A Democratic sweep, which would mean Biden winning the presidency and Democratic control of the Senate.
A Democratic sweep would leave no uncertainty, higher taxes, more regulations, and the ongoing push for renewable energies.
BoA school of thought is that a unified Democratic government would be bullish, they argue that to keep the minority vote onside, during the mid-term elections, a strong Democratic government will promote pro-growth, pre-employment policies through fiscal stimulus. Lower-income groups have the highest money velocity, and that is good for consumption. New taxes and regulations would be offset by planned consumption and investment incentives, argues BoA.
The election trading strategy for a “blue wave” election outcome is to buy the dip, particularly renewables
BoA’s school of thinking in a nutshell is bold leadership is needed, which can only be achieved by a government majority in both chambers.
Likely winners would renewable energy, advanced industrials, electric vehicles, telecommunications, banks, and silver
As we noted silver outperforms.
Scenario 2, a bearish gridlock with President Biden and Republican Senate
If Republicans retain the Senate they are likely to frustrate stimulus under a Democratic President. So, we would see more of the same sluggish economic growth and more Fed stimulus.
Election trading strategy would be to “raise cash and buy Treasuries, minis, and high-quality corporate bonds,” according to BoA.
Scenario 3, the “status quo” President Trump plus any senate.
Election trading strategy would buy stagnation winners e.g. tech, consumer discretionary, large caps, and IG bonds
Scenario 4, a contested election, the election trading strategy would equal a buying opportunity
BoA recommends investors to trade for a contested election and use the opportunity to buy risky assets and sell volatility. In the worst-case scenario, there is always a bailout.