Investing.com – As the United States prepares for the highly anticipated 2024 elections, BCA Research advises investors to take precautionary measures and reduce the risk in their portfolios.
The financial outlook is clouded by an economic slowdown, geopolitical tensions and the likelihood of market volatility in the run-up to November.
While BCA assigns a slight advantage to the Democrats, the margin is narrow and the possibility of market disruption remains high. Investors should proceed with caution and position themselves defensively to mitigate potential risks.
One of the main concerns highlighted by BCA Research is the looming threat of a recession.
“Unemployment is rising and has triggered the ‘Sahm rule’, suggesting a recession is looming,” the analysts said.
While unemployment rates remain manageable in key states, an unexpected spike could create a domino effect and trigger a market sell-off.
The US stock market, which typically peaks six months before a recession, could experience a sharp correction as early as September or October.
This reflects the pattern seen during previous crises, such as the 2008 financial crisis, when an economic shock coincided with a major stock market crash.
“For now, favor U.S. assets over global assets, U.S. bonds over stocks, defensive stock sectors over cyclicals, healthcare over other defensives, and aerospace/defense over other cyclicals,” the analysts said.
The reasoning is simple: during periods of economic downturn, industries that provide essential services or receive support from government spending tend to perform stronger.
Furthermore, with recessionary pressures mounting, US bonds are likely to outperform stocks, positioning fixed-income assets as a safer option for preserving capital.
Beyond economic concerns, geopolitical instability adds another layer of uncertainty. The BCA report highlights how rising tensions with Russia and China could impact global markets.
Russia, in particular, poses a unique risk because of its potential for economic retaliation, such as restricting oil or uranium exports. Such measures could have a shock effect on global energy markets, driving up prices and adding further strain to an already fragile global economy.
China, which is facing its own economic slowdown, poses structural risks that could reverberate throughout the global financial system. Investors should take note of these geopolitical flashpoints, as any escalation in these areas could further destabilize markets.
Adding to these concerns is the possibility of so-called “October surprises.” The BCA identifies several potential disruptions that could emerge just before the election.
These include sharp increases in unemployment, outbreaks of social unrest or even a major geopolitical event such as a border crisis or terrorist attack.
Each of these scenarios has the potential to shift voter sentiment and influence the market, so it is imperative that investors anticipate and react to these possibilities.
BCA stresses that any of these developments, especially if they catch the market off guard, could push stock volatility to new highs.
Uncertainty surrounding the election outcome is also contributing to market volatility.
According to BCA projections, Democrats have a 55% chance of securing the White House, but the race is far from decided.
A landslide Republican victory would likely lead to a very different set of outcomes, including major tax cuts, major tariff increases, significant immigration restrictions and a greater likelihood of a regional war in the Middle East.
On the other hand, a Democratic victory would bring gridlock, small tax increases, a marginal fiscal improvement, a brinksmanship with Russia and the formation of coalitions against China. In Europe, Canada, Mexico and Japan, political risk premiums would fall not in absolute terms but in relative terms to a Trump victory.
Amid this political uncertainty, BCA urges investors to prepare for further market fluctuations regardless of the outcome of the election.
As neither side has a clear advantage, the risk of unexpected disruptions (whether economic, political or geopolitical) remains a serious concern. Risk reduction is therefore a smart strategy.
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