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'Markets love gridlock,' strategist says on midterm elections

Amanda Agati, chief investment officer at PNC Asset Management Group, joins Yahoo Finance Live to discuss inflation, the expected market reaction to the U.S. midterm elections, the potential for a divided government, the outlook for the Fed, and how investors should position their portfolios.

Video Transcript


BRAD SMITH: We've got financial issues like gas prices and inflation holding sway. But if you're banking on that post election bump, this year might be a little different. Here with more, we've got Amanda Agati, who is the PNC asset management group chief investment officer.

Amanda, great to have you here with us today. First and foremost, when we think about the correlation of this midterm election day to how markets may perceive it. What are you gonna be watching for?

AMANDA AGATI: Well, we're very much focused on this potential change of control scenario playing out here. Markets love gridlock. Markets like stability and calm. And in the face of so much volatility, not only in Washington this year but really with all of the macro headwinds swirling, markets are gonna be very focused on, are we gonna get that change of control scenario playing out here?

So that we can't have too many negative policy surprises in one direction or another. And I think we could all breathe a sigh of relief for some stability coming out of Washington.

BRIAN SOZZI: Amanda, why should investors be rooting for gridlock here? I know the data supports that's usually a good thing. But right now, this country needs help. Look at inflation, people can't even get out there and buy groceries.

AMANDA AGATI: It's a really tough backdrop. And I don't want to be the buzzkill of the group here but I think it's definitely gonna be very different this time around, in terms of a post election rally, for what you just said. The inflation backdrop and the perfect storm of macro headwinds that continue to swirl, are really in the driver's seat.

In fact, I would say the Fed is really in the driver's seat. There really isn't a lot of an appetite coming out of Washington for more fiscal policy accommodation. We've kind of hit a wall as it relates to that. And when we have a divided government scenario here, it's unlikely that a lot of meaningful legislation is gonna get passed in short order to help settle down the inflationary backdrop. So while markets tend to anticipate more policy accommodation post midterm elections, I think that's gonna be very hard to come by this time around.

BRAD SMITH: Amanda, when we think about how the markets might actually evaluate a surprise in the midterm elections, you know, what might take place there? And is there a shock that could be in store at all?

AMANDA AGATI: I actually-- maybe this is kind of like a snoozer from my perspective and I'm being naive about it, but I don't actually see a meaningful shock to the system as a function of what's happening with the run up to the midterms here. It really seems-- based on all the different guideposts that we look at, some have greater predictive power than others. But actually, this is an interesting setup where every guidepost that we look at suggests a change in control.

It doesn't necessarily mean a Republican sweep. But even with the House going Republican and the Democrats potentially hanging on to the Senate, it's a very narrow margin there so we'll see how that plays out, that's enough of gridlock for markets to be calm and stable as a function of that outcome.

When we look at economic data, it suggests a potential change in control. And we look at the polling data, it definitely suggests a change in control. Even market performance is a really strong voting machine. And over the last three months, it's handily voting in favor of a challenge of the status quo.

So I think that's really the answer here. I'm not expecting to see a notable shock. Perhaps we should catch up tomorrow and see whether I've gotten any sleep at all tonight watching the results come in.

BRIAN SOZZI: Amanda, to that point, you know, your portfolio's positioned for gridlock. And if so, where are those allocations?

AMANDA AGATI: So we're still very much playing defense. As I said earlier, the Fed is ultimately in the driver's seat. And with the Fed staying uber hawkish, you know, we really need to kind of play some defense here.

The contrarian in me wants to get excited about new investment opportunities. And inflection points in the cycle, that's really where the new opportunities are born. But we're not quite there yet.

So from a positioning perspective, we're still leaning US over international, larger over smaller capitalization. We've kind of neutralized our growth versus value bet. That's been a pendulum swinging all year long back and forth. And so it hasn't paid to be handily positioned one way or the other.

And then in fixed-income markets, we actually still very much like unconstrained strategies. With how volatile equity markets have been, fixed-income markets have been even more so. And so the value that active managers and unconstrained strategies can bring, has really been significant this year.

And then believe it or not-- I cannot believe I'm saying this-- but we actually like cash here. Cash as an asset class is starting to look interesting for the first time in the better part of 10, maybe 15 years with where yields are moving to. And so we've started to build some cash positions in our fixed-income allocations.