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'The big prize is Florida:' Analyst on the election impacting markets

Yahoo Finance's Alexis Christoforous and Isaac Boltansky, director of policy research at Compass Point Research & Trading, LLC, discuss market volatility ahead of the 2020 election.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, the presidential election is shaping up to be one of the messiest and most unusual political contests in modern memory. With shouting match debates and historic turnout for early voting, no one can say for sure when we'll have a clear winner, and more important, what will happen if either one of those candidates does not accept the results.

Here to talk about all that and more and how it may all play out on Wall Street is Isaac Boltansky, Director of Policy Research at Compass Point research. Isaac, always good to see you. So at this point, is the biggest risk to this market a contested election?

ISAAC BOLTANSKY: Yeah, look, I think that that's always fair to say, Alexis. Uncertainty is bad. And this has the potential to be a very uncertain period of time. And really, when you peel back the onion and say why, it's because of this massive surge in online-- excuse me-- in mail-in balloting, over 95 million so far. And we've already seen more voting occur early in the state of Texas, for example, than we saw in all of 2016.

So I think that we've really got to dig in and be aware that this isn't going to be a normal election. It hasn't been up to this date. And it's not going to be in its final days, because I think that Americans are gonna go to bed tomorrow night without knowing who the victor is. And that's important, not just for all of us as citizens, but also for the market.

ALEXIS CHRISTOFOROUS: What happens to the stock market if we don't have a clear winner by tomorrow? What happens Wednesday morning?

ISAAC BOLTANSKY: Yeah, look, I think that there are going to be certain signals tomorrow night where we can get an extra degree of clarity, right? For example, I know some of my clients are watching the Research Triangle in North Carolina. There are a few counties there that should be able to give us some feeling for how the suburban vote is going to fall.

But the big prize is Florida. And Alexis, I think that's really the ballgame here from at least a directional standpoint, because there are lots of paths for Biden to win without Florida. There aren't that many paths for the president to win without Florida. And the nice thing is at least we're gonna most likely get Florida tomorrow night and actually know by bedtime-- whatever that may be for you-- who the winner of Florida is.

We're gonna have to wait until, it looks like, the end of the week for Pennsylvania and some other states. So I think the market's gonna have at least some signaling as to what the outcome will be when they get back in on Wednesday morning.

ALEXIS CHRISTOFOROUS: Interesting that you would point out Florida among the battle states-- the battleground states-- because both candidates have spent so much time in Pennsylvania. And just the other day, over the weekend, when he was in Pennsylvania, President Trump said, if we win Pennsylvania, we win America. To your mind, is Florida more important-- or more telling, if you will-- then how Pennsylvania winds up voting?

ISAAC BOLTANSKY: I think that we're all just going to be looking for any data point we can to do our best to try to get a feel for where things are going. My point, and what I'm telling my clients, is Florida is the most important and most likely the first of those data points that we're going to get on election night. Pennsylvania is the prize. It is. And so that, the state has said, is going to take until probably the end of the week to actually finish counting all of their mail-in ballots.

So you're not going to get firm certainty until the end of the week, it looks like, Alexis. But from an investment standpoint, we should start to get some clarity tomorrow night with Florida. And that's the takeaway, I think.

ALEXIS CHRISTOFOROUS: So, Isaac, let's walk through some different scenarios for investors. If we do get the blue wave, as so many are predicting-- the Senate goes back Democratic and we get a Joe Biden win-- what are some of the sectors that you think stand to win the most? And then, conversely, who might be some of the big losers in that scenario?

ISAAC BOLTANSKY: Yeah, so look, if we talk about the blue wave more broadly, I think, first and foremost, on the macro side, there's going to be this narrative clash. There is going to be a focus initially on the stimulus that is likely to come in the first quarter of next year. And it's very difficult to fight against trillions of dollars of fiscal stimulus coming into the market. But then investors are going to have to reckon with the tax changes and the regulatory changes that would happen thereafter.

Within that blue wave space, we focus primarily on financials. And I think that there are some stories there that make a lot of sense-- for example, housing at the lower end of the economic spectrum. I also think that Puerto Rico is one of the outsized winners, so you can focus on some of the banks and payment companies there, and then, of course, companies that don't have outsized exposure to tax changes. And so you look at reach, generally, maybe some of these venture BDCs. There are absolutely areas and ways to play that blue wave where you won't get hurt as much by the tax changes and the regulatory changes that would come in the back half of 2021.

ALEXIS CHRISTOFOROUS: You know, four years ago, when Trump won, it surprised a lot of folks. The market, there was that initial knee-jerk reaction to the downside, and then it popped up right away. What are you seeing them-- how do you see the market reacting if we get a Trump win and the Senate remains GOP? What happens then?

ISAAC BOLTANSKY: Yeah, so look, I think, at that point, the only thing you can have any relative confidence in, Alexis, is that the House is staying in Democratic control. They're likely-- Democrats are likely to pick up anywhere from 10 to 12 seats or so, so their majority will be bolstered.

And so in the scenario you're talking about, with a Trump White House and a GOP Senate, the market, I think, is going to initially be a little bit disappointed in that they won't get that $2 trillion stimulus that they are currently expecting from a blue wave. But they will then see that there will be no meaningful tax changes to worry about and the president's deregulatory agenda will continue without major pushback.

And so, to me, I think, in that scenario, the market moves higher, albeit with some concerns around the total scale and scope of fiscal stimulus next year.

ALEXIS CHRISTOFOROUS: Before we let you go, I got to ask you this last scenario. What if it's a split decision-- Trump wins the White House and the Senate remains-- and the Senate goes Democratic? What happens then? Is it gridlock on Capitol Hill, and is that what Wall Street wants in the end?

ISAAC BOLTANSKY: Well, look, it would be a total mess. It would be nothing but investigations and oversight and all of the hurt feelings and spiteful words from everyone in DC. But there is a little bit of optimism that, in that brief initial period with Democrats in control of Congress and President Trump in the White House, that we would have some deal around stimulus spending and maybe even that long-awaited infrastructure spending. But ultimately, once you got past any short-lived honeymoon, it would just be gridlock.

ALEXIS CHRISTOFOROUS: Yeah. Remember that, when we used to talk about infrastructure? Maybe we will again. Isaac Boltansky, Director of Policy Research at Compass Point. Thanks so much.