Uncertainty and volatility to continue rising into election, BCA warns

BCA Research analysts warn that political uncertainty and market volatility are set to increase as the election approaches, despite improving odds for a Trump victory.

The failed assassination attempt on President Trump has raised the analysts’ subjective odds of Republicans winning the White House to 60%, with a 55% chance of a single-party sweep.

The election, however, remains highly competitive. BCA notes, “The economy is still expanding, and new shocks or surprises could help the ruling party.”

Their quantitative models, which incorporate state-level economic data, slightly favor Democrats for the executive branch.

They add that what stands out is the potential for an “unorthodox second-termer winning a single-party domination with a mandate to pursue rapid structural change.”

This scenario is expected to lead to higher volatility as financial markets grapple with the implications of increased policy discontinuity and uncertainty.

“Hence, investors should expect higher volatility as financial markets struggle to price an increase in policy discontinuity and uncertainty,” writes BCA.

BCA highlights that “single-party control poses downside risks to the equity market in the short run due to uncertainty.”

In the long term, it is said to likely be inflationary, though this remains uncertain. The analysts also mention that gridlock is generally benign from a policy perspective, but a cyclical economic slowdown is anticipated regardless.

The firm said it recommends going long US 10-year treasuries.

According to BCA, the bottom line is that “the cyclical economy is slowing today.” They predict that if Republicans achieve a full sweep, they will likely crack down on immigration and trade and implement at least modest economic stimulation. As a result, investors should brace for increased uncertainty and volatility in the lead-up to the election.