Business Cycle Should Influence Markets More Than Elections: Morgan Stanley By Investing.com

As the US approaches another presidential election, investors are naturally curious about how the outcome might affect the markets.

However, Morgan Stanley analysts suggest that the economic cycle, rather than the election, will have a more significant impact on market behavior.

Morgan Stanley said in a note to clients on Monday that while election years are often filled with speculation and predictions, the historical impact of elections on markets is less clear.

“Our cross-strategy team’s study of the run-up to previous elections shows no clear pattern of market behavior in election years, even when looking at different election and macro conditions,” the bank said.

The uncertainty surrounding the election, especially in a polarized electorate, is said to further reduce the likelihood that investors will base their short-term strategies solely on election results.

In particular, Morgan Stanley points out that certain sectors could have a more pronounced post-election impact based on the different policies of the two major parties.

For example, they say energy and telecommunications could struggle under the Democrats’ plan to expand tax breaks, while clean tech could benefit from boosted credits under the Inflation Relief Act.

In addition, the bank says the US Treasury yield curve and the US dollar are also areas to watch. A Republican win, for example, could lead to higher rates, potentially leading to a steeper yield curve as shorter-dated bond yields fall.

Morgan Stanley says the US dollar, often a safe haven, could strengthen if former President Trump wins, despite his criticism of a strong greenback.

They believe this could be due to potential tariffs and increased geopolitical uncertainty, which could lead to more accommodative central bank policies abroad.

While the election generates headlines, Morgan Stanley believes business cycle dynamics will play a more critical role in shaping market trends in the coming months.