Investors’ Club podcast: Fallout from the US presidential debate (6:18)
Following an unsteady performance for President Biden, CIO’s Tom McLoughlin and Jon Gordon discuss the market implications and what comes next.

UBS conversations: Blackstone CEO on the evolution of private market investing (9:23)
Gas prices—a key election theme—will be an important issue for many voters when they cast their ballots this November. But how much of an impact do elections really have on them? Stacey Morris, Head of Energy Research at VettaFi, explains. Add the series to your calendar.

Thought of the day

President Biden and former President Trump went head-to-head on stage late Thursday for the first debate of the election cycle, with a 90-minute format that featured timed responses, muted microphones between turns, and the absence of a live audience—all designed to keep the exchange under control and policy-focused. The debate was marked by pointed exchanges over the economy, immigration, abortion, national security, and foreign policy.

While this format was expected to favor Biden, it did not. The president failed to assuage concerns over whether he could withstand the rigors of another four years in office. Trump, on the other hand, used the format effectively to deflect the moderators’ more uncomfortable questions and focus instead on other topics to his advantage. The US dollar and US equity futures are up modestly in the hours after the debate, suggesting rising market confidence in a Trump win.

The next major catalysts ahead for the US election include the formal party nomination conventions in July and August, respectively, and then a scheduled second debate in September. Former President Trump, now holding an advantage, may see less reason to offer Biden a second opportunity. The US electorate remains polarized, and we expect to see a great deal of discussion over whether investment portfolios should be reexamined.

But we think adjusting one’s longer-term financial plan abruptly in the wake of a single debate entails its own risks, and may ultimately prove counterproductive. Instead, we recommend investors take the following considerations into account in the leadup to the election, which remains over four months away with a highly uncertain outcome.

Investors should not vote with their portfolios. Academic research supports the belief that political affiliation has a direct impact on one’s level of optimism regarding the future direction of the economy. Those who share an affiliation with the party in office are more likely to believe that financial assets are undervalued and respond by increasing their allocation to equities. Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy. This partisan bias is a dangerous element for investors, especially in a politically charged election year, threatening to override one’s objective assessment of risk and potentially skewing investment behaviors. While the election will be consequential, the US political outcomes are far from the largest drivers of global economic growth and financial market returns.

The independence of the Federal Reserve is unlikely to be uprooted. One major driver of the financial market this year has been the expectation of the Fed’s policy move, and we do not think there would be a substantive shift in the central bank’s responsibility in a second Trump administration despite a likely increase in criticism. It is important to remember that the Fed has often been subjected to criticism from elected officials seeking easier money and lower interest rates. Any attempt by a future president to alter the composition of the Fed’s Board of Governors would face statutory obstacles, and overt political interference in the execution of monetary policy would most likely trigger an adverse and counterproductive market reaction. Overall, we believe incoming economic data will continue to point to a slowing US economy with falling inflation that would allow the Fed to start policy easing later this year.

Manage portfolio risks accordingly. While the election outcome is still uncertain, volatility is almost guaranteed ahead of the election And the result will impact markets and government policy. Managing portfolio risks is therefore important. In equities, we think investors should examine their exposure to the US consumer discretionary and renewable sectors, both of which could suffer if Trump wins the presidency with a Republican Congress due to trade tariffs and lower government support. On the other hand, we think the financial sector is currently not pricing the potential for lower regulation that could materialize under such scenario. In addition, we think defensive structured investments with capital preservation or yield-generating features can help investors manage risks in sensitive stocks and sectors. Finally, gold can act as an effective hedge against fears of geopolitical polarization, inflation, or excessive deficits.

So, we see ways investors can consider managing risks surrounding the US elections, and believe that a balanced and well-diversified portfolio across fixed income, equities, and alternatives can best help investors position for long-term financial goals while withstanding periodic political upheaval.