Edward J. Perkin, Chief Equity Investment Officer, Eaton Vance says U.S. stocks have been in a holding pattern in recent weeks as investors closely monitor the latest election polls and try to envision what the world might look like after November 8.

Here he presents three scenarios worth contemplating, with potential investment implications for each scenario.

Scenario 1: Hillary Clinton wins, Republicans retain the House

This is the scenario that’s currently priced into the market. In this election outcome, the status quo of a divided government would remain in place. However, there could be some opportunities for compromise on things like corporate tax rates, which both the parties agree are far too high and making the U.S. increasingly uncompetitive globally with other countries that have lower corporate tax rates. I think there’s also a reasonable agreement that could be reached on a fiscal spending package, particularly if it were infrastructure-oriented.

Scenario 2: Clinton wins, Democrats take the House

This scenario would be a Clinton landslide with the House of Representatives flipping to the Democrats. If this happens, Clinton could be able to push a more progressive agenda around college tuition and minimum wage, with more regulation of the banks and the energy sector. Clinton has also talked about finding a way to put a lid on drug prices, so presumably that would be bad for pharma and biotech. Conversely, a minimum wage increase could help parts of the consumer sector.

Scenario 3: Donald Trump wins

The third scenario, which I think is least likely at this point, would be if Trump wins. I think the markets initially would take that very negatively. There would be fears of a trade war and the potential impact on the U.S. dollar and immigration policy. I think it would be very much like Brexit with a sharp sell-off initially, then investors would buy the dip. I think the longer-term ramifications of a Trump presidency wouldn’t be as negative as some fear. There could be significant corporate tax rate reductions, repatriation of all the overseas trapped cash, and major infrastructure spending.

Bottom line: These are three different scenarios, with very different potential implications. For investors, it’s important to not just assume the base case, but to consider the alternative scenarios and associated risks as well.

Source: Eaton Vance

Join the discussion