‘With just a week to go until the US Presidential election, we are entering into a tunnel of uncertainty’

Donald Trump

Susannah Streeter, Senior investment and Markets Analyst, at Hargreaves Lansdown shares her thoughts on the outlook for US stocks as the presidential election draws closer.

With just a week to go until the US Presidential election, we are entering into a tunnel of uncertainty, with the polls tightening in key states at the same time as Covid 19 infection rates continue to spike in parts of the country. The sell offs we saw early this week are partly a reflection of this – with stimulus talks appearing to stall again and the direction for the country unclear and it’s likely that volatility will remain the name of the game as election day approaches.

But although the coronavirus crisis has already ravaged the US economy, there has overall been a disconnect with the stock markets which recovered from the shock plunge in March to reach new record highs. That’s partly because many of the industries which are worst affected make up only a small proportion of the S&P 500 for example, whereas the tech sector, which has performed strongly during the pandemic, represents a large portion of the index.

E-commerce king Amazon has seen a huge uptick in orders during the crisis, Tesla had reported robust progress in both production and deliveries, and Apple’s recent product was well received, but there are increasing concerns that the tech sector is over- valued and could be heading for a correction. Netflix results showing a slowdown in new subscribers may be an early warning sign that consumers simply brought forward purchases of goods and services, while they spent far more time stuck in their homes.

In many ways the behavioural changes Covid 19 has brought about are only an acceleration of digital trends already sweeping through the economy. This has added to optimism that US stocks which have already seen big gains will still be a safer longer term bet and among clients, investor confidence in North America has risen again this month, while it’s dropped for Europe. In terms of the top overseas shares traded, Tesla, Amazon, Apple and Microsoft led the list, but there was also significant interest in mobile payments company Square Inc, Paypal and a Tesla rival, the Chinese electric car maker NIO.

So, although overall American stocks seem to doing very well recently, there is a huge divergence between the performance of different sectors, with tech riding high and looking expensive but energy retail and travel stocks suffering. Even within sectors, there is a performance gap, illustrated by recent banking earnings. A tale of very different banking giants has emerged with Wells Fargo falling following a big hit on earnings due to an increase in bad debt provisions for retail and business customers, while Goldman Sachs and J P Morgan beat expectations thanks to a boom in trading .

The biggest risk to investors is likely to come if there is not a smooth transition of power and the outcome of the election is contested, which is likely to cause an extended period of volatility on US financial markets. A major dip in the stock market however, could prompt the Federal Reserve to step in with extra stimulus to stem a dramatic sell off. Although congress has so far failed to reach an agreement on an emergency plan to inject cash into the US economy, it was partly under an expectation of fresh spending that the tech sector made up ground from its September slide.

If Joe Biden is successful and the Democrats take over the White House, the technology sector is likely to come under intense scrutiny with Democratic Party lawmakers expressing an appetite for breaking up the enormous power of big tech. Already the US Department of Justice has filed charges against Google, accusing the company of anti-competitive practices law to preserve its monopoly over internet searches. The US fracking industry could also face tougher regulation under a Biden administration putting further pressure on energy stocks which have already seen sharp declines due to the fall in the price of oil and the pivot to green energy.

The key is to spread the risks so your holdings aren’t over-dependent on one US election outcome or the other to prosper. For large tech holdings, it may be wise to trim some profits now to diversify. Given, the potential of a contested election and an extended period of volatility, investors may also want to consider widening a portfolio to contain defensive stocks like utilities, insurers and other assets considered a safe haven such as gold, which could also act as a hedge against a possible rise in inflation down the road if a large stimulus plan is agreed. But it would also be prudent to maintain a healthy cash balance, as a buffer against unforeseen consequences.