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The issue with the 2020 election is not the aftermath, it's the path to get there: JPM Head of Cross-Asset Strategy

Yahoo Finance’s Brian Sozzi and Alexis Christoforous discuss the possible stock market outcomes for a Trump versus Biden Presidency with JP Morgan’s Head of Cross Asset Fundamental Strategy, John Normand.

Video Transcript

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 JP Morgan's head of Cross-Asset Fundamental Strategy, John Normand, now to discuss. Good morning, John. So JP Morgan 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-- 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 in your note that it would be wise for investors to go underweight US assets versus 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 the 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 reelected 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 state. The second is this highlighted the contested election. That's why we think clients should be underweighing US stocks versus other stock markets. Why I think they should be underweight the dollar versus safer currencies, like the yen or even long, long gold right now.

BRIAN SOZZI: But also important, John, to show the other side 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 a 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 draw down, and that's something that's absent right here. It doesn't-- 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 then who becomes president, it's who controls Congress. And if there's a Democratic sweep, you know, 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 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 a 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 or 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 JP Morgan. Thanks for being with us this morning.

JOHN NORMAND: Thank you.