Why 2016 tells us the election’s ‘biggest surprise’ will bring a great 2021 for investors, strategist says

Investors are gearing up for the busiest week of third-quarter earnings season, as October ends with a flurry of corporate results. Apple, Google parent Alphabet, Facebook, and Amazon  will all report earnings on Thursday, while Microsoft reports on Tuesday.

Toy company Hasbro and cloud communications platform Twilio  will get things going on Monday, while aerospace company Boeing, construction equipment manufacturer Caterpillar, drugmakers Pfizer and Gilead Sciences, conglomerate General Electric, oil company Exxon Mobil and United Parcel Service are among a host of other big companies set to report this week.

Rising COVID-19 cases across Europe and the U.S. continue to concern investors, while U.S. stimulus talks have further dampened the mood as House Speaker Nancy Pelosi and White House chief of staff Mark Meadows both accused each other of moving the goal posts in separate CNN interviews on Sunday. U.S. stocks slipped lower at the open on Monday.

Of course, next week’s election, and the uncertainty that brings, is also at the forefront of investors’ minds.

In our call of the day, BTIG analysts said the sector-level “knee jerk” reaction to next week’s presidential election could be wrong, regardless of the outcome, as it was in 2016.

Strategists Julian Emanuel and Michael Chu said the “biggest surprise” this time around may be near-term market weakness resulting in a “high quality buying opportunity” setting up for a positive 2021.

The pair looked to 2016 and the stock market reaction to the “all-time surprise” of President Donald Trump’s win for lessons heading into the 2020 vote, in a note on Sunday. Financials, energy and technology led throughout 2016, with health care underperforming, they noted.

Financials and energy then surprised after the 2016 vote, with one final month of outperformance before becoming consistent laggards, while health care troughed in the month post-vote before becoming a consistent leader, and tech was sold short term before its renewed bull run. Heading into the 2020 election, consumer discretionary and tech have led, while financials and health care have lagged behind, they said.

“While the temptation may be to associate 2020’s sector performances with a [Joe] Biden victory, the message is likely less nuanced,” With the VIX volatility index sitting at 28 ahead of next month’s election, compared with 14 ahead of the 2016 vote, BTIG analysts said surprise is the “base case” scenario this time around.

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The market was likely to drift lower in the near term, with no stimulus bill being likely until after Inauguration Day in January, COVID-19’s resurgence and election uncertainty, they said, and recent tactical weakness in tech and consumer discretionary may continue as investors look to sell winners.

Stimulus early in 2021 would support financials, and health care has an attractive discount to the S&P 500 due to investor fear over political outcomes. “Ultimately though, the biggest surprise, like in 2017, may be that whatever Washington, D.C. is in January, near-term market weakness results in a “high quality buying opportunity” setting up for a positive 2021,” they added.

This article originally appeared on MarketWatch.

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