In ‘Dead Heat’ elections, stocks play defense: markets align

(Bloomberg) — Stocks lost traction, bonds rose and the dollar fell, with polls still showing a tight race in the U.S. presidential election ahead of the Federal Reserve’s decision.

Stocks hovered around session lows after the Wall Street Journal reported that Russia is suspected of planning to send incendiary bombs to U.S. planes, citing Western security officials. Even before that report, options markets showed many on Wall Street remaining defensive as a wave of polls showed U.S. voters narrowly divided both nationally and on the crucial swing states that will decide the election. Treasury yields fell across the curve and the dollar fell the most since August.

The other positioning challenge is the number of additional catalysts around the vote that are likely to move the market. Election Day will be quickly followed on Thursday by the Fed decision and Jerome Powell’s press conference, where he will provide details on the central bank’s interest rate path. And a large portion of American companies have yet to report their earnings.

“Normally the Fed rate announcement would dominate this week’s discussion, but this isn’t just any week,” said Chris Larkin of Morgan Stanley’s E*Trade. “Traders and investors who have been awaiting the outcome of the election should prepare for the possibility of a delayed outcome and the potential impact of that uncertainty on markets.”

In terms of stock market performance, the S&P 500 tends to post positive returns as it closes the year after Election Day, according to Bespoke Investment Group. For all years since 1990, the average gain has been 3.3%, with a positive return 25 out of 34 times. During election years, performance has tended to be modestly stronger, with an average gain of 3.9% and wins six out of eight times.

The S&P 500 fell 0.5%. The Nasdaq 100 fell 0.4%. The Dow Jones Industrial Average fell 0.9%.

The yield on ten-year government bonds is nine eight basis points to 4.30%. The Bloomberg Dollar Spot Index fell 0.4%.

Oil advanced after OPEC agreed to push back production increases by a month in December and tensions rose in the Middle East.

“Of course, the US elections this week will play a prominent role in moving the financial markets,” said Anthony Saglimbene of Ameriprise. “However, a policy decision from the Federal Reserve on Wednesday, some light economic data during the week, and roughly 20% of the S&P 500 scheduled to report third-quarter results should also have a decent impact on directing share movements.”

With both US presidential candidates in a dead heat heading into next week’s election, markets are bracing for an outcome that could lead to a wide range of policy outcomes. Still, it’s notable that since 1933, stocks have almost always risen by double digits at the end of a president’s term, regardless of party affiliation, according to Seema Shah of Principal Asset Management.

“Investors need to be careful. Those who allow their political views to cloud their investment decisions may miss out on the potential benefits that come with staying invested in the market over the long term,” she noted.

According to Dan Wantrobski of Janney Montgomery Scott, US stocks remain largely in consolidation mode ahead of this potentially historic week. Investors should expect “more choppy, range-bound trading” in the coming sessions, he noted.

“Depending on how things develop, the markets themselves are either making new highs (the primary trend is still bullish) or bigger declines (the overbought environment persists, with some recent support levels broken),” Wantrobski said.

Some of the major moves in the markets:

This story was produced with the help of Bloomberg Automation.

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