Morgan Stanley CIO on how the elections could impact markets

Yeah, well, thanks Joe, thanks for having me. Look, I think the election is taking all the oxygen out of the room. And of course we have the pandemic still, which is still on people's mind. We have a second wave to go through, we know it's coming. I think how we deal with the second wave is going to be more important for the market than the second wave itself, similar to the lockdowns we saw earlier. And because it is the political hot season, risk of lockdown and sort of activities along those lines are more elevated. So yeah, it's all coming to a head. We have five weeks to go. Tonight's a big night obviously from the election standpoint, and it's going to remain volatile. So that's why we've been more comfortable with this consolidation call. We think that the 200-day moving average is a really good support line. It's not that far from here on the downside, 3100 in S&P terms, and then on the upside we really hit some very powerful resistance around 3600, 3550 for this term, and we got rejected. That range makes a lot of sense, but that's a big range, Joe. That's a highly volatile environment. So we've been advising clients to take their closures down a little bit here into this period. And we think the most important message we want to leave with clients right now is this is a bull market, as you know we've been saying since March. It's a new economic cycle, more importantly. And so into this consolidation, we want to be adding risk, and we want to be adding risk in areas that may not be so obvious to most folks, which is instead of buying some of these leaders for the last 10 years, you want to now rotate towards parts of the economy, parts of the market that have not yet benefited from what we think is going to be a recovery that goes into next year. And those are things that people generally probably don't own much of.

No, let's talk about it. The thing is, I don't think the outcome of election matters as much as policy. So politics is different than policy. And here's the thing: we're in a recession still, we're in a pandemic. And so our view is that next year we think it's going to be very difficult for either side to avoid those facts. And what that means is we're going to get more spending from Congress, whether it's before the election, which now the chance of that has gone down, or after the election. And the market's smart enough to look through that and say, okay, it's a waiting game at this point. We're going to get it either now or later, because ultimately the politicians will have to cave to the fact that we're in a recession and a pandemic and we still need some of that fiscal support. So I think that's the main message as to why we don't think it matters in the short term. Now longer term, obviously who's in the White House, who's in Congress matters a ton for policy, but we think that effect will be more felt at the sector level, at the stock level, than it will be at the market level, because as I mentioned, we think the market could be supported by more fiscal spending. So let's talk about some of those industries. Clearly, with a Democratic sweep, folks are worried about more regulation in the financial area and perhaps energy, obviously with the environmental focus. So those are sectors that probably won't do particularly well. If you look at technology, however, that's an area that has been ripe for regulation in many people's view, but there's a view that the Democrats won't be as tough on the tech sector and they won't be as tough on China perhaps, so maybe that helps that area. So it's clearly important. We think it's going to be a very close election in both the congressional elections as well as the White House, and that's going to keep the volatility high until we get through. So we think it's a bull market either way, however you're going to want to skew your portfolios depending on who wins.