Investing.com — As the US prepares for the highly anticipated 2024 elections, BCA Research advises investors to take precautions and de-risk their portfolios.
The financial landscape is clouded by economic slowdown, geopolitical tensions and the likelihood of market volatility heading into November.
Although BCA gives the Democrats a small advantage, the margin is small and the risk of market disruptions remains high. Investors should proceed cautiously and position themselves defensively to limit potential risks.
A major concern outlined by BCA Research is the looming threat of a recession.
“Unemployment is rising and has triggered the ‘Sahm rule’, indicating a recession is coming,” the analysts said.
While unemployment rates remain manageable in key states, an unexpected spike could cause a ripple effect, triggering a market sell-off.
The U.S. stock market, which typically peaks six months before a recession, could see a sharp correction as early as September or October.
This mirrors the pattern seen during previous recessions, such as the 2008 financial crisis, when an economic shock coincided with a major stock market collapse.
“For now, favor US assets over global, US bonds over equities, defensive equity sectors over cyclicals, healthcare over other defensive sectors, and aerospace/defense over other cyclical sectors,” the analysts said.
The reasoning is simple. During periods of economic contraction, sectors that provide essential services or are supported by government spending tend to perform more robustly.
Furthermore, given rising recessionary pressures, US bonds are likely to outperform equities, making fixed income assets a safer option for capital preservation.
In addition to economic concerns, geopolitical instability adds another layer of uncertainty. BCA’s report highlights how rising tensions with both Russia and China could impact global markets.
Russia in particular poses a unique risk because of its potential for economic retaliation, such as limiting oil and uranium exports. These moves could send shockwaves through global energy markets, raising prices and putting further pressure on an already fragile global economy.
China, struggling with its own economic slowdown, poses structural risks that could reverberate through the global financial system. Investors should keep these geopolitical pressure points in mind, as any escalation in these areas could further destabilize markets.
Adding to these concerns is the prospect of so-called ‘October surprises’. BCA identifies several potential disruptions that could occur just before the elections.
These include a sharp increase in unemployment, outbreaks of social unrest or even a major geopolitical event such as a border crisis or a terrorist attack.
Each of these scenarios has the potential to shift voter sentiment and influence the market, making it imperative for investors to anticipate and respond to these possibilities.
BCA emphasizes that any of these events, especially if they take the market by surprise, could drive stock volatility to new highs.
The uncertainty surrounding the outcome of the election itself also contributes to market volatility.
According to BCA projections, Democrats have a 55% chance of securing the White House, but the race is far from settled.
A Republican move would likely lead to very different outcomes, including major tax cuts, major tariff increases, major immigration restrictions, and an increased likelihood of regional war in the Middle East.
On the other hand, a Democratic victory would lead to gridlock, small tax increases, marginal budget improvements, nuclear cooperation with Russia and coalition building against China. Europe, Canada, Mexico and Japan would see political risk premiums fall not in absolute terms, but in proportion to a Trump victory.
Amid this political uncertainty, BCA urges investors to prepare for greater market swings regardless of the election outcome.
With neither side having a clear advantage, the risk of unexpected disruptions – whether economic, political or geopolitical – remains a serious concern. That’s why reducing risks is a smart strategy.
