It was a mixed start to the week on the markets. Certain cannabis stocks were down, while some energy stocks were up. In terms of commodities, gold, silver, and light sweet crude were rising. Overall, the top gainers were gaining more than the top losers were losing. Looks good? Not quite.
On the face of it, this is an encouraging state of affairs. The North American markets look healthy. In Canada, metal and mining stocks are rising, and financials are improving.
But investors should consider how precarious this situation is. The S&P/TSX Composite Index was up 0.4% Tuesday. This might seem innocuous at worst and bullish at best. But consider the potential for a market correction right now. It could come from anywhere. A vaccine setback, international tensions, worsening consumer sentiment, or — the big one — an unexpected U.S. election outcome.
Bank stocks are at a crossroads
Let’s stick with that latter eventuality for a moment. Analysts are divided as to whether North American markets are rising because of an expected Trump win or an expected Biden win. Both sides have their advocates, and both sides have compelling data analysis to back them up.
What this means, though, is that no matter which candidate wins the contest, a whole swathe of the markets could go into post-election shock. That means that financials investors will be heading into the middle of November amid an intensely volatile market. And the outcome could see stocks such as TD Bank either tank or soar.
Certain theses are predictable. A Biden win next month will see cannabis and green power stocks rocketing, while oil stocks and big corporate names nosedive. A Trump win will likely see the opposite effects. Overall, though, investors could end up selling everything else. Unless, of course, the actual outcome of the election is the one that the market really is predicting. And that’s a tough one to call.
Hold onto those TD shares
That said, there’s a general term that refers to nature as taking the path of least resistance. When applied to predicting outcomes of complex scenarios, it’s therefore tempting to assume that the markets — if they could vote — would favour the status quo. After all, it’s no secret that the stock market is allergic to change. The question now, though, is whether investors are expecting change or not.
To go back to the bullishness in the markets, it makes sense that the areas rising before a crash are the ones that have the most to lose. Financials are looking especially at risk, therefore. Those shares in TD Bank and friends? Expect them to go through an especially rough patch if the U.S. elects an anti-corporate president.
But also be prepared for the alternative. 2016 saw the markets go into shock the night of the U.S. election. Few observers saw a Donald Trump win coming. But financials quickly surged 4% on the outcome. This alone should indicate which way shares in the Big Five could to go in just under a fortnight. Canadian bank shareholders of a conservative nature may therefore want to keep calm and carry on holding.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.