By Callum Keown
Investors are tackling a myriad of factors right now, including rising COVID-19 cases and the stalled talks over a new U.S. stimulus bill.
But with just days to go, the U.S. presidential election, and the uncertainty that brings, is at the forefront of investors’ minds.
BTIG analysts said the sector-level “knee jerk” reaction to next week’s presidential election could be wrong, regardless of the outcome, as it was in 2016.
Strategists Julian Emanuel and Michael Chu said the “biggest surprise” this time around may be near-term market weakness resulting in a “high quality buying opportunity” setting up for a positive 2021.
The pair looked to 2016 and the stock market reaction to the “all-time surprise” of President Donald Trump’s win for lessons heading into the 2020 vote, in a note on Sunday. Financials, energy and technology led throughout 2016, with health care underperforming, they noted.
Financials and energy then surprised after the 2016 vote, with one final month of outperformance before becoming consistent laggards, while health care troughed in the month post-vote before becoming a consistent leader, and tech was sold short term before its renewed bull run. Heading into the 2020 election, consumer discretionary and tech have led, while financials and health care have lagged behind, they said.
“While the temptation may be to associate 2020’s sector performances with a [Joe] Biden victory, the message is likely less nuanced,” With the VIX volatility index sitting at 28 ahead of next month’s election, compared with 14 ahead of the 2016 vote, BTIG analysts said surprise is the “base case” scenario this time around.
The market was likely to drift lower in the near term, with no stimulus bill being likely until after Inauguration Day in January, COVID-19’s resurgence and election uncertainty, they said, and recent tactical weakness in tech and consumer discretionary may continue as investors look to sell winners.
Stimulus early in 2021 would support financials, and health care has an attractive discount to the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.81% due to investor fear over political outcomes. “Ultimately though, the biggest surprise, like in 2017, may be that whatever Washington, D.C. is in January, near-term market weakness results in a “high quality buying opportunity” setting up for a positive 2021,” they added.