With the U.S. presidential election approaching in November, professional investors agree on one strategy – diversification remains key. Stocks have been rising this year, with the S&P 500 and Nasdaq Composite ending the week at record highs, despite questions over when the Federal Reserve will start cutting interest rates. A rotation into large-cap growth stocks briefly sent indexes lower on Thursday, but they rebounded on Friday, with the Dow Jones Industrial Average briefly hitting a new intraday high. Now, election-related risks are also being considered. To give investors an idea of how to best assemble their portfolios ahead of time, CNBC Pro asked three Wall Street pros to share their advice on how to allocate assets in the weeks ahead. Diversify to Hedge Tax Risk Mike Bailey of FBB Capital Partners said that if former President Trump wins, his tax cuts could mean a better overall outlook for the stock market. “The big thing that could have a big impact on the stock market is tax rates,” the firm’s director of research told CNBC. “Certainly the last time taxes went down, we saw a huge uptick.” Bailey stressed that while his investment strategy avoids forecasting macro Economic events and timing the market, but investors may find it helpful to look at the extreme outcomes of the election, although investors may obviously get different results depending on the outcome of the election. Bailey highlighted that renewable energy stocks could be boosted in the event of an all-blue sweep. These include Tesla, NextEra and a number of solar panel stocks. On the other hand, a red wave could benefit oil and gas companies, banks and pharmaceutical stocks. Against this backdrop, the most important thing for investors is to diversify their portfolios, Bailey said. He recommends diversifying into different asset classes, as higher tax rates could cause the stock market to fall. “If tax rates change, I don’t think bonds will move that much, so you’re pretty safe in that respect,” he said. “If tax rates change and you have a big multinational in the U.S. — a big pharma or a big tech company — then only a portion of their revenue is going to be affected… So just make sure you’re diversified. Don’t get caught up in that. A bunch of U.S. domestic small-cap stocks are stuck, and that’s about it. John Davi, chief investment officer at Astoria Portfolio Advisors, who rotates out of Magnificent 7, believes that the interest rate cycle will have a bigger long-term impact than the election, he told CNBC: “No matter where. Whichever side wins, we’re still going to have huge deficits and we’re still going to spend money, so we think inflation is going to be structurally higher over the next few years. David said if the prospect of a rate cut by the Fed this year becomes more solid, that would justify exiting growth assets on Thursday, adding that it was the “most important decision” investors could make today. “If we do get a couple of rate cuts, this rotation away from growth and into other areas of the economy outside of the big seven is going to continue,” he said. “You make a ton of money on Mag 7; it The gains are beyond anyone’s expectations. The rest of the U.S. market is very, very attractive, so your entry point into stocks is everything.” In addition to domestic equities, Davi also focuses on emerging market assets. China could play an important role depending on the outcome of the U.S. election, as could Mexico if manufacturing continues to move closer to the U.S. in the reshoring process. Geopolitics, credit show need for diversification Sri-Kumar Global Strategies president Komal Sri-Kumar agreed with Davi’s assessment that investors should focus on diversifying away from the seven largest stocks between now and the November vote. This is especially true as possible geopolitical risks may increase in the run-up to the election. “The stock market is very tight and some of these companies are even trading at higher than average valuations,” he told CNBC. “That’s why (investors) need to be more careful, especially because of this short period before and after the election.” Within, value becomes very important.” Beyond the stock market, Sri Kumar also believes that the risk of another credit event has risen. Whether that means a banking crisis or a commercial real estate crisis, it could pose a hurdle for the market.
How professional investors prepare for the presidential election | Real Time Headlines
RELATED ARTICLES