John Normand, JP Morgan Head of Cross-Asset Fundamental Strategy, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss how the 2020 election will impact the markets and more.
ALEXIS CHRISTOFOROUS: With the 2020 presidential election a little more than six weeks away, investors are weighing the possible stock-market outcomes for a Trump versus Biden presidency. Let's bring in JPMorgan's Head of Cross-Asset Fundamental Strategy John Normand now to discuss. Good morning, John. So JPMorgan out with its 2020 election outlook report. What is the firm predicting is the most likely possible outcome right now?
JOHN NORMAND: Well, if you just go with the polls, I suppose the most likely outcome is that Biden will be the president. It seems a much tougher call to really determine which way the Senate is going to go. So it looks like it's leaning Democratic. That I think generally has some hopeful messages for particular sectors of the US equity market. There is this offset as to what this means for tax policy. But we think that when the uncertainty clears-- and it might take a month after the actual election for uncertainty to clear-- we do think markets are going to trade up.
BRIAN SOZZI: John, I was reading your note out this morning, and in there you note that it would be wise for investors to go underweight US assets relative to other assets. Why is that so?
JOHN NORMAND: Well, the issue is not what the aftermath of the election will bring. The issue is the path to the election. First, the issue that has to be resolved is the fiscal cliff because that reduction in income support from the federal sector to the household sector means that growth could step down pretty meaningfully in the fourth quarter of the year, right around the election uncertainty.
And then the second issue is when will we know who the next president is? We have an election, which is quite different from previous ones in terms of the focus on postal voting. We have an incumbent president who's essentially guaranteed to question the outcome of that vote if he's not re-elected president. So even if we think the outcome of policy might be constructive in a few months' time, the path to that has a number of potholes in it. One is what's going on with the fiscal debate in the states. The second is this highlight of the contested election. That's why we think clients should be underweight US stocks versus other stock markets, why I think they should be underweight the dollar versus safer currencies like the yen or even long gold right now.
BRIAN SOZZI: But also important, John, to show the other side of the case. Now, you're not expecting a 10% market correction. Why is that the case?
JOHN NORMAND: No, I just think some of the positioning elements that tend to proceed very large stock-market drawdowns are absent. We tend to see a lot of hedge market-- or hedge-fund participation in the stock market when equities are at a high and vulnerable to a big drawdown, and that's something that's absent here. It doesn't really account for the retail activity that's been quite high in the market over the last few months, but at least the absence of a lot of hedge-fund participation I think limits the extent of this drawdown that's occurring in the context of a lot of economic and political uncertainty.
ALEXIS CHRISTOFOROUS: John, in your election outlook report, do you talk at all about which way Congress may swing? Because as we know perhaps even more importantly than who becomes president, it's who controls Congress. And if there's a Democratic sweep, what are the investment opportunities there?
JOHN NORMAND: Of course. So obviously if it's a sweep, it gives control of tax policy, and the tax agenda or the fiscal agenda as Biden has sketched it out seems net stimulative. It seems to be a broader range of spending programs that he's focusing on compared to the tax hikes. So we think of that as positive for infrastructure. We think of that as positive for consumer discretionary. It will eventually be positive for the overall stock market.
But, again, the Senate races are much tougher to judge because there are a number of them that are in play, and a lot of these polls are within three or four percentage points between the Republican and the Democratic challenger. That means you're essentially within the margin of error. So huge wild-card risk around that. It's very important. But the fact that we won't have the election result probably until a few weeks after November 3 means there will be time to kind of position for the sweep if that's the way the polls are going to end up.
ALEXIS CHRISTOFOROUS: All right, John Normand, head of cross-asset fundamental strategy at JPMorgan, thanks for being with us this morning.
JOHN NORMAND: Thank you.