Investors Should Reduce Risk Ahead of US Elections, BCA Advises

As the U.S. gears up for the highly anticipated 2024 elections, BCA Research recommends that investors take precautionary measures and reduce risks in their portfolios.

The current financial climate is fraught with issues such as economic slowdown, geopolitical tensions, and the potential for market volatility as November approaches.

BCA Research suggests a slight edge for the Democrats, although the margin is narrow, indicating that the risk of market disruptions is significant. Investors are encouraged to proceed with caution and adopt a defensive positioning to shield themselves from potential pitfalls.

A critical concern raised by BCA Research is the looming possibility of a recession. Analysts refer to the “Sahm Rule,” which has typically signaled that a recession is on the horizon, particularly as unemployment rates begin to rise.

While unemployment is currently manageable in important states, an unexpected spike could send shockwaves through the market, potentially triggering a sell-off. Historically, the U.S. stock market tends to peak six months before a recession, suggesting that a sharp correction could occur as early as September or October. This pattern mirrors past downturns, such as the 2008 financial crisis, where an economic shock coincided with a significant market collapse.

BCA advises favoring U.S. assets over global ones, U.S. bonds over stocks, defensive equity sectors over cyclicals, healthcare over other defensive sectors, and aerospace/defense over other cyclical industries. The rationale behind this strategy is clear: sectors that provide essential services or are backed by government spending generally weather economic downturns better.

In addition, with increasing recessionary pressures, it is likely that U.S. bonds will outperform equities, making fixed-income assets a safer choice for preserving capital.

Geopolitical instability further complicates the financial landscape, with BCA’s report pointing to rising tensions with both Russia and China as potential disruptors of global markets. Russia’s unique risk stems from its ability to leverage economic sanctions, such as restricting oil or uranium exports, which could destabilize global energy markets and exacerbate the ongoing fragility of the world economy.

China’s economic slowdown also poses structural risks that could echo throughout the global financial system. Investors should remain vigilant about these geopolitical flashpoints, as any escalation could lead to further market destabilization.

Adding to these uncertainties are the potential “October surprises.” BCA identifies various disruptions that could arise just before the election, including significant spikes in unemployment, social unrest, or major geopolitical events such as a border crisis or terrorist attack. Each of these scenarios could shift voter sentiment and impact market dynamics, making it essential for investors to anticipate and respond to these developments.

BCA emphasizes that unforeseen events, particularly those that catch the market off guard, could elevate equity volatility considerably.

The inherent uncertainty surrounding the election outcome will also contribute to market volatility. According to BCA’s projections, Democrats have a 55% chance of winning the presidency, but the race remains highly competitive. A Republican sweep could result in a very different set of outcomes, including substantial tax cuts, tariff increases, tight immigration policies, and a heightened likelihood of conflict in the Middle East.

Conversely, a Democratic victory could lead to legislative gridlock, minor tax increases, slight fiscal improvements, nuclear tensions with Russia, and efforts to build alliances against China. Political risk premiums in regions like Europe, Canada, Mexico, and Japan may only decrease relative to a Trump victory, not in absolute terms.

Given this political uncertainty, BCA advises investors to brace for increased market volatility regardless of the election’s outcome. With no party enjoying a decisive advantage, the potential for unexpected disturbances—be they economic, political, or geopolitical—remains a significant concern. Consequently, de-risking is a prudent strategy as the nation moves closer to the election.