How the U.S. elections could impact markets

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Julie Zhang, director, North America sales enablement, discussed potential market impacts of the upcoming U.S. elections. They also spoke about the latest growth numbers from China, in addition to preliminary third-quarter earnings season highlights.

U.S. elections loom. How might markets react?

As Election Day approaches in the U.S., questions over whether the 3 November contests could represent a buying opportunity are mounting, Ng said. She cautioned that successful investing isn’t about trying to time the market’s reaction to a specific event. “In my opinion, reaching your investment goals is more about putting your money to work over the long-haul in a diversified, multi-asset portfolio,” she stated.

That said, Ng noted that market overreactions can present good buying opportunities, and that this may be the case in the upcoming U.S. election. Why? “First off, it’s important to understand that the U.S. government is deliberately designed to make it difficult to enact big, sweeping policy changes-regardless of the political makeup of Congress and the White House,” she said.

In the here-and-now, this means that while certain outcomes of the 2020 elections-such as a potential Democratic sweep-may lead to a few changes (including a possible increase in corporate taxes), the results are unlikely to be a main driver for markets in the long-term, Ng noted. Because of this, any panic selling in the wake of the elections may present a potential buying opportunity, she added.

“Ultimately, in our view, the election outcome-whether it favours the Republican party, the Democratic party or ends in gridlock-will be secondary to the key factors we think will continue to shape market behaviour moving forward. These include the current phase of the economic cycle, the path of the coronavirus and the potential for a COVID-19 vaccine later this year or in 2021,” Ng explained.

New numbers show rebound underway in China

Switching to China, Ng noted that recently released data on the world’s second-largest economy suggests a solid rebound is underway. “The Chinese government reported a 4.9% expansion in gross domestic product (GDP) during the third quarter, on a year-over-year basis-and that’s on the heels of the 3.2% GDP growth rate charted during the second quarter,” she said. While China’s latest GDP number came in a bit below consensus expectations, higher-frequency data-such as September retail sales, industrial production and jobless rates-more than compensated for the slight miss, Ng added.

So, how could China’s recovery from the coronavirus-induced recession impact markets? “The Chinese economy-particularly Chinese demand-is a massive driver of the global economy,” she explained, “and such demand strength may benefit both commodities and cyclical equities.”

The early read on Q3 earnings season

Transitioning to corporate earnings, Ng said that while third-quarter earnings season is still in its early stages, the latest numbers indicate that both U.S. and European companies are beating rather low expectations.

“Blended earnings-which incorporate published earnings with expected earnings-suggest that third-quarter year-over-year earnings will decline by about 17% in the U.S., and 30% in Europe,” she stated. While these numbers represent an improvement from consensus expectations, Ng said that markets have probably already priced in these stronger-than-expected results.

Under the surface, one interesting development relates to the growth and value styles, or factors, within equities, Ng said. While second-quarter earnings showed that value names were hurt more by the recession than growth names, there’s some indication that earnings of value companies may have recovered a bit more than earnings of growth companies during the third quarter, she explained.

“While current prices don’t necessarily reflect this, I do believe this offers some hope that value or cyclical stocks may fare better amid the ongoing economic recovery,” Ng concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.