The electoral relief rally is on pause — for now

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Presidential elections create tough market headwinds. But resolution allows for powerful relief rallies. It is critical though that investors are not blindsided by that rally as it unfolds.

What is clear is that yesterday was not an instant blow-out. What is not clear is how soon we will know a winner or who that winner will be. But in positioning around elections it is helpful to recognize that there are both policy implications and behavioral implications of elections, and that these have completely distinct market consequences.

The behavioral implications are much more straight forward. Once elections are resolved, a relief rally should be expected. And that rally should be expected regardless of who wins and (perhaps except in extreme cases, this contest, in my opinion, not qualifying) regardless of the long-term policy implications of that win.

Discerning the policy implications is the more complex, long lived process. As we do not yet know our winner, or really how that winner will govern, planning for those policy implications is an exceedingly complex process that should be done in a measured, disciplined way that is implemented over periods measuring in months and quarters, not days and weeks.

It is human nature to want to be on the sidelines until this process is over. I field that call regularly. I try to dissuade people, in part because I expect that relief rally and in part because I see our individual holdings as well positioned regardless of near-term gyrations. But I know there are an awful lot of red and blue dollars on the sidelines. I know that because I hear individual investors making that decision regularly. They are all sure that what they are doing makes sense. I would expect that one of those groups of dollars will be getting invested as soon as they are confident the other color did not win. When that happens, their risk appetite will go up, and so will risk assets.

This is a rare moment when those who are not properly invested for their intermediate and longer-term goals are being given a — perhaps only slightly — longer window to work though their fears, recognizing that policy from Washington is only one part of what drives long-term returns, and that our system is actually quite robust and will not be upended by the results of one very tightly contested election.

The future is always a bit uncertain, but our democracy is almost 250 years old and we seem to be in the midst of another peaceful selection of our president for the next four years.

Until we know the winner, we can expect plenty of risk-aversion and for the relief rally that seemed to be percolating over the past couple of market sessions to remain on pause. It is important to note that one element of this risk-on trade is a broadening of the market advance away from the mega-cap growth names that are increasingly being used as more defensive, less risky ways of getting cash off of balance sheets. A true risk-on relief rally would involve a broadening of that advance with indexes apart from the Nasdaq 100 rallying in the order of magnitude of 5-15% in a very short span.

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