By Paul R. La Monica

The polls continue to show that the outcome of the presidential election may be too close to call. But don't tell that to Wall Street: Stocks, bonds, and various betting markets are predicting that Donald Trump will defeat Kamala Harris.

Strategists at J.P. Morgan said in a report Thursday that "markets have been increasingly embracing the Trump trade." Stocks have gone up, and so have long-term bond yields. It looks like Wall Street is betting on a lot more stimulus spending.

"The rising prospect of a Trump win is at the same time raising fears among investors that inflation will reemerge as a problem at some point in late 2025 or 2026," the J.P. Morgan strategists said, noting that "looser fiscal policy" would contribute to inflation as well.

So what should investors do about that? The J.P. Morgan strategists looked back to how the markets performed from mid-2020 through mid-2023, when supply-chain disruptions largely resulting from the pandemic boosted prices sharply.

Their verdict? Buy stocks, oil and economically-sensitive commodities like copper. Fixed income and precious metals could lag behind.

"During that three year period it was mostly equities and energy as well as industrial metals among commodities that managed to beat inflation. Bonds in general underperformed inflation and that was also true with gold," the strategists wrote. Stocks, they said, are "an essential overweight for those fearing inflation risks during a second Trump presidency."

Gold prices have surged more than 30% this year, so a pullback wouldn't be that big a shock. Copper prices, up about 12%, have just recently started to gain momentum because the Federal Reserve's September rate cut and stimulus in China have raised hopes for a soft landing for the global economy.

Of course, it isn't that simple. Others have pointed out that a second Trump term could escalate trade tensions with China, which didn't exactly dissipate during the Biden administration. More tariffs globally could hurt many consumer and industrial stocks.

The broader concern is that a Trump (or Harris) win should lead to resurgent inflation because of increased deficits and tax cuts. That means long-term rates may not fall soon.

"Fears of higher stimulus are part of the narrative right now," said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. "There's a buyer strike in bonds."

With that in mind, bank stocks also look attractive. The J.P. Morgan strategists said that financials could benefit for a variety of reasons. Large U.S. banks could get a bump from higher long-term rates, which boosts profits from loans, while regional banks may be helped by a boost to rates and further deregulation of the industry in a second Trump term.

Two top regional bank exchange-traded funds, the iShares U.S. Regional Banks ETF and SPDR S&P Regional Banking ETFs, are both up more than 4% in the past month, outperforming the market. Top regional banks such as PNC, M&T Bank, Truist Financial, Citizens Financial Group, and U.S. Bancorp are major holdings in these funds.

Melson also likes the bank stocks, saying that the financial sector is "the poster child for the soft landing trade." He argues that other cyclical value sectors, namely industrials and consumer discretionary, also look attractive. Tech stocks should continue to benefit from the artificial-intelligence spending boom as well, he said.

But at the end of the day, many experts argue that investors shouldn't make any major changes to their portfolios due to the election.

"The election has the potential to create some short-term noise. But it should be just short-term as long as the economic backdrop remains the same," said Aya Yoshioka, a portfolio consulting director and senior investment strategist with Wealth Enhancement Group, a financial advisory firm.

As always, it's more important to keep your eyes on the economy, Federal Reserve, and corporate earnings than partisan politics.

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.

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October 25, 2024 15:24 ET (19:24 GMT)

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