Morgan Stanley believes that if the Republican Party wins, there may be a negative impact on economic growth due to immigration reform and tariff issues. Considering inflation and fiscal sustainability, these dynamics may pose headwinds to the market's low-quality, cyclical sectors, and small-cap stocks.
As the probability of Trump's election victory increases, Morgan Stanley strategists suggest that investors should be cautious and choose high-quality US stocks during the US election season.
On Monday, July 1st, Eastern Time, Morgan Stanley's strategist team, led by Michael Wilson, suggested that investors should be more picky and focus on investing in high-quality stocks that usually have more stable income, stronger balance sheets and higher profit margins, while avoiding small cap and cyclical stocks.
The main reason is that they believe that if the Republican Party wins, immigration reform and tariff issues may have a negative impact on economic growth. Considering inflation and fiscal sustainability, these dynamics may constitute headwinds for low-quality, cyclical and small cap stocks in the market.
Their research found that in the 3-6 months before the election, the performance of high-quality stocks usually outperformed the market by about 4% to 5%. In addition, volatility usually increases in September of election years and continues until October, and then slows in November. Therefore, historical data shows that the market has not fully focused on election risks yet.
Looking ahead, the strategists wrote that the current state of the economy, such as employment and inflation data, the Federal Reserve's remarks, and the upcoming earnings season, are more important than election results.
Edited by Jeffrey