With the upcoming U.S. presidential election on the horizon, investors are eager to understand how the markets might be impacted by the outcome. However, analysts at Morgan Stanley suggest that the business cycle will have a more significant influence on market behavior than the election itself.
In a note to clients, Morgan Stanley stated that while election years are typically filled with speculation, the historical impact of elections on markets is not clearly defined. Their cross-asset strategy team’s analysis of past election cycles revealed no consistent pattern of market behavior, even when considering various election and macroeconomic conditions.
The uncertainty surrounding the election, especially in a politically polarized environment, is expected to deter investors from solely basing their short-term strategies on electoral results. Morgan Stanley also pointed out that certain sectors may experience more noticeable post-election effects based on the policy differences between the major political parties.
For example, sectors like energy and telecom could face challenges under the Democrats’ proposal to extend tax breaks, while clean tech industries might benefit from continued funding under the Inflation Reduction Act. Additionally, the bank highlighted the importance of monitoring the U.S. Treasury yield curve and the U.S. dollar.
A Republican victory, for instance, could lead to increased tariffs, potentially resulting in a steeper yield curve as yields on shorter-maturity bonds decrease. Morgan Stanley also suggested that the U.S. dollar, typically considered a safe haven, could strengthen if former President Trump is re-elected, despite his previous criticisms of a strong dollar.
This potential scenario could be driven by the implementation of tariffs and heightened geopolitical uncertainties, which may prompt central banks overseas to adopt more accommodative policies. While elections capture public attention, Morgan Stanley believes that the underlying dynamics of the business cycle will have a more significant impact on shaping market trends in the coming months.