Protecting your portfolio amid election volatility

All right, well, today's market action reflecting a shift in sentiment towards a Harris victory as yields in the dollar pushed lower in what's been seen as a Trump trade. Joining us now, we want to bring in Vince LaRusso, Cloud Capital president and CEO. Cloud Capital is a global multi-strategy alternative asset management firm. It's great to have you here. Vince, let's talk about what is currently being priced, and we certainly have seen a shift here this morning compared to the trades that have been playing out over the last week or so. How are you positioning here ahead of tomorrow? Yeah, thanks for having me. So we really, at Cloud Capital, as active managers over cycles, really, we have to think about our time horizons. And one of the things that we observe about elections generally is they introduce volatility. But if you step back and look at the economic cycle, where we are in the capital markets, we don't really see anything with regard to the election or the Fed that's going to shift our posture from being really bullish on equities. We have comfortable levels of growth. We have increasing productivity. The Fed is becoming more accommodative. Regardless of who wins the election tomorrow, we think that the backdrop for equity investing is pretty compelling and favorable. That said, we do expect some higher volatility. So you think about a portfolio that can be both in the markets, in capital appreciation mode, but thinking about ways to reduce volatility in the short term. And that's really the needle that we're trying to thread at Cloud Capital partners right now, always guided by that longer-term perspective about where we can generate risk-adjusted returns for our clients over cycles, not day-to-day or week-to-week, or even election-to-election. What do you typically see after an election cycle in the subsiding of some of that volatility? And how long on the other end of the spectrum, I'd ask, do you see it perhaps continuing as you're trying to figure out how to play this out? Yeah, so it's a great question. At a capital markets perspective, when you think about asset allocation into equities or fixed income, the longer-term drivers like demographics, where we are with growth rates, thinking about the growth in GDP in the US economy, thinking about valuations, they're not as impacted. So that's what gives us the confidence in the longer-term outlook here and the bullish posture. So when you have a specific candidate that wins, and by all accounts, regardless of which candidate wins tomorrow, we will see an increase in spending. And that's been kind of a consensus narrative through this campaign, is that both of these parties seem inclined to spend money from a fiscal policy perspective. The question becomes potentially which sectors or areas of the economy will benefit disproportionately or will be hindered by a shift in spending across sectors or areas of the capital markets. And that's a difficult thing for active managers to navigate. But all indications are, from our perspective, that we're going to see increases in spending. Demographics are not going to change based on the election. The Fed's going to continue to become more accommodative. CPI or inflation has come down from high single digits. We're now in that low single-digit territory. So it feels to us like a really kind of goldilocks scenario for equities. But to your point, when you think about the longer-term implications of who wins, you can see a candidate or a party really lean heavily into a sector. Sometimes you see spending in health care or defense or durables. And some of the things that might benefit from particular fiscal policy decisions make it interesting for us as active managers. We can go do the security analysis and try to identify which companies specifically are going to benefit. But we see very little this week that's really going to shift our bullish posture on equities. And that's why we're in this capital appreciation mode at Cloud Capital. So then, Vince, it sounds like you think that the market's set to rally no matter who wins the election. I guess, what does that upside then look like here for the market? Yeah. So in the near term, we do expect that volatility. So whether that's a rally or a little bit of a sell-off, we're seeing a shift in the U.S. dollar this morning just relative to Friday. So that market posturing and positioning and hedging that's going to take place this week, we'd be really hard pressed to try to anticipate whether it's going to be a kind of a launch hire or a little bit of a sell-off. And we're really not going to let our portfolios be turned upside down by those gyrations in the market. Our investors expect us to be able to endure some of that volatility in the near term as long as we can do a good job, hopefully, over cycles of positioning them for appreciation. When you step back and answer your observation about what is the upside from here, look, we think valuations are actually still pretty compelling. And there's a lot of focus on AI and tech and the big tech, multiple on earnings. We step back and say, look at the free cash flow generation. Look at some of the valuations of small cap companies. I don't think we would want to own small cap stocks in aggregate. There are some that are not profitable today, some that we think won't ever be profitable. But we can do the work at the bottom up level, the security analysis that finds really kind of compelling risk rewards for us. And sometimes we think about a guide work or a framework for equities that can potentially even double in valuation over a couple of years. So these are not one day, one week, one month type of investments. This is us, the team at Cloud Capital doing individual security analysis saying, look, can we get high single digit free cash flow yields? Can we find companies that are paying down debt and increasing the return to shareholders? And frankly, we think the market is really ripe with those opportunities. There's a lot of diversification of returns right now. Correlations are coming down, really good backdrop for equities, maybe an even better backdrop for active managers. And that's what gets us so excited right here. To what extent would you say that this election is, and compared to previous elections, is a portion of buy the rumor, sell the news, where you're looking at a lot of the pre-election data and pre-finalized results data and trying to figure out how to best position your portfolio in anticipation of returns that you might be able to see and realize later on. How much of that is playing out right now? And is there one trade that investors should be comfortable with placing before the election results? Yeah, that's a good question. So that positioning of expectations is just one of the endemic aspects of equity analysis. Equities are a discounting mechanism, so we try to discount the future. Insofar as too many folks move to one side of the boat versus the other, there's going to be this natural positioning back to potential risk aversion, trying to get right-sided in front of an election. The polls are basically indicating this is going to be a close election. And I don't know that we have a really high degree of confidence in the pollsters. I mean, there's so many nuances with regard to the exit polls and the strategies, the way questions are asked. So again, we would step back and say it's really hard to predict the outcome. We know it's close enough to say it's within the margin of error of the polls. So when you try to position a portfolio within that environment, I think an area that jumps out to us is utilities. And utilities have had a really good year. But one of the things in the context of your question around risk-adjusted returns or reducing volatility, the backdrop for utilities looks really strong to us because they can be defensive. Even if we have a slowdown in the economy or consumer discretionary purchases, utilities are more defensive. We also see that increase in demand driven by AI and the build-out of data centers. So we think utilities are really interesting from that perspective. And we think that yields will be going down. So we've been in kind of a 40-year bull market for bond prices and yields going down, with a notable exception being COVID. And COVID inspired monetary stimulus, fiscal stimulus, yields went up. We think we get back to a trajectory where yields go down. And the Fed might go down a little bit this week. And again, that's bullish for utilities. So utilities are an interesting area of the market for us right here, because across kind of a range of potential outcomes, they seem to be on the right side of the equation. Vince LaRusso of Cloud Capital. Vince, thanks so much for taking the time here with us ahead of the market open this morning. Appreciate it. My pleasure.