By Paul R. La Monica
The presidential election remains a nail-biter -- and with no clear consensus as to who will win, some Wall Street experts are predicting major moves in portions of the financial markets if former President Donald Trump defeats Vice President Kamala Harris.
J.P. Morgan strategists said in a report that there is the potential for short covering in regional banks and small market-capitalization stocks, which could get a boost from deregulation and tax cuts if Trump wins. Short covering occurs when bearish investors who bet against a stock have to buy back the position in the event of good news -- a move that pushes the price even higher.
For investors looking to buy regional banks, consider the SPDR S&P Regional Banking, the iShares U.S. Regional Banks, and Invesco KBW Regional Banking exchange-traded funds. They have all lagged behind the S&P 500, which has gained more than 20% this year. These three regional bank ETFs have also underperformed when compared with the more megacap-bank-loaded Financial Select Sector SPDR ETF, which has climbed about 25% higher.
Small-cap stocks, despite a recent rebound that is due in part to a still-healthy U.S. economy and expectations that the Federal Reserve will keep cutting interest rates, have also lagged behind the broader market. Two top small cap funds, the iShares Russell 2000 and SPR Portfolio S&P 600 Small Cap ETFs are each up less than 10% this year.
Bitcoin and gold could get a further lift from a Trump win, the J.P. Morgan strategists also said. That largely stems from expectations of a weaker dollar, which could come about due to a combination of more fiscal stimulus -- especially if there is a "red sweep" scenario that gives Republicans control of the White House and both chambers of Congress -- and Trump tariffs.
Add in the possibility that the Fed continues to cut interest rates, and that could also be bad for the greenback -- but good for crypto and gold.
"As the US election approaches, retail investors appear to be embracing the 'debasement trade' in an even stronger manner by buying bitcoin and gold ETFs," the J.P. Morgan strategists noted, adding that "there could be additional upside for bitcoin and gold prices in a Trump win scenario."
With that in mind, the SPDR Gold Trust and iShares Gold Trust may get a lift. Investors might also want to consider top Bitcoin ETFs, such as the iShares Bitcoin Trust, Grayscale Bitcoin Trust, Fidelity Wise Origin Bitcoin Fund, and the ARK 21Shares Bitcoin ETF, which could all get a boost from a Trump win.
Yar-Joe Kandiah, founder and chief architect of TheTrumpToken, one of numerous political-themed coins hoping to benefit from a potential Trump victory, said the outcome of the election could determine if Bitcoin hits a new record of $80,000 or higher in the near-term -- or slides back toward $50,000. Bitcoin prices are currently hovering around $70,000.
"The crypto community is in anticipation of a bull market. U.S. policy is very influential for the global market as a whole and Trump has been openly friendly to crypto," Kandiah said. "When you look at the alternative, people see restrictions."
But the same forces that may lift crypto and precious metals could turn out to be a mixed bag for bonds. The J.P. Morgan strategists noted that investors betting on a return of inflationary pressures could short long-term bonds via the iShares 20+ Year Treasury Bond ETF.
They added that spreads between investment grade corporate bonds and high-yield, or junk, bonds may continue to narrow as well if Trump wins.
"The sharp tightening of US corporate credit spreads since August 1st implies high probability of [a] Trump win embedded in credit markets," the J.P. Morgan strategists wrote, adding that elevated levels of short interest in the iShares iBoxx $ Investment Grade Corporate Bond ETF is a potential sign that investors are betting on a higher chance of a Republican sweep, which could benefit junk bonds.
Along those lines, keep the iShares iBoxx $ High Yield Corporate Bond ETF in mind. It has outperformed its investment grade counterpart, as well as many other more diversified bond ETFs, since early August.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 01, 2024 17:28 ET (21:28 GMT)
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