Volatility typically rises before presidential elections in normal years and this year is anything but normal. Investors better have strong stomachs and focus on the fundamentals, said Niladri Mukherjee, senior investment strategist at Bank of America Merrill Lynch. “The president election is a key risk for the markets and the economy. Companies could slow down or stall their Capex plans as well so investors better take care,” said Mukherjee, adding that one positive is that both candidates are talking about infrastructure spending. The Federal Reserve’s low rate leanings has also come up on the campaign trail and Mukerjee said policy remains accommodative and he expects the tightening cycle to be slow. He is looking for volatility to pick up as the market transitions from an ‘ultra-accommodative’ monetary policy to ‘just accommodative.’ Regarding the Brexit fallout, Mukherjee said the negotiations between the U.K. and Europe will take time and will be an overhang the region. Furthermore, he said markets are underestimating the populist sentiment, especially in Europe. He points to important elections next year in the Netherlands, Germany and France and the rise of “Euro-skeptic parties” to be a concern. “Worries about Europe breaking apart will keep risk premiums high in Europe with potential spillover into global markets,” said Mukherjee. If the European breakup sentiment gains traction, the euro has more downside, according to Mukherjee. But he expects the dollar to remain stable – and not take off – due to the slow pace of Fed hikes. As for oil, Mukherjee said prices are likely to move higher from here as the market rebalances due to strong demand and moderating supply. However, in his view long term prices will stay in the $40 to $70 range as higher prices beget more supply from shale players. “Lower oil prices ultimately are good for consumer spending and growth, especially in Europe,” said Mukherjee.
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