As the highly anticipated US Presidential election draws closer, the question for us in this part of the world, though, is to what extent should investors care?
If we look at history, the second half of an election year is normally still positive for the US stock market, despite the risk of increasing volatility just before the election.
This suggests that significant political uncertainty is not normally the dominant driver for investors.
Hence, we remain overweight global equities and have a preference for US equities.
We see inflation moderating in the second half of the year, with upside inflation surprises already starting to fade. This should allow the Fed to start cutting interest rates in the second half of the year and bond yields to decline.
The US stock market has a high weight to technology and communication service sectors, which are more resilient to a growth slowdown and benefit more from lower interest rates and bond yields.
Meanwhile, after stagnating in 2023, earnings are recovering strongly and outperforming expectations. All this suggests that equities are likely to grind higher in the coming months.
After the election, things get more complicated.
At the risk of oversimplification, there are 3 main scenarios: a clear Democrat victory, a narrow Democrat victory and a Republican clean sweep.
In the first scenario, fiscal policy will likely remain tilted towards high spending and raising taxes on the wealthier segments of society. It would also signal strong support from Ukraine and continued sponsorship of the decarbonisation agenda.
Meanwhile, a tight Democrat victory would likely mean that the House and Senate are split. Arguably, from an economic perspective, this could be the best outcome as dramatic policy changes would be challenging to implement, probably resulting in the least fiscally-irresponsible outcome.
However, the political environment would be challenging. It is possible that the Republicans could formally endorse the ‘stolen election’ mantra, which could lead to significant clashes between ardent supports of both parties.
Finally, a clean sweep for the Republicans probably minimises the political uncertainty, but leaves the door open for radical economic, trade, immigration and geopolitical policy shifts. There is a sense that Trump did not have the machinery around him in his first term to drive his agenda efficiently. Many believe that it would be different this time.
Trade tariffs would likely be introduced, given cross-party support for greater protectionism. While China is the focus, tariffs and threats of tariffs could extend to allies as well. Immigration would likely be sharply curtailed. Support for Ukraine would likely fall dramatically, while oil would be promoted over green energy. Finally, fiscal policy is likely to remain very loose as the Trump tax cuts implemented during his first term are extended indefinitely.
So, what does all this mean for investors in the longer term?
Making predictions based on political outcomes is always risky. Remember 2016 when the overwhelming narrative was that a Trump win would be bad for equities.
On confirmation of his victory, the stock market dipped intra-day, but then rose over 30% in the next 14 months.
Trump’s policy agenda, on the face of it, looks the riskiest. His fiscal, trade and immigration policies look inflationary. However, he is also likely to be more supportive of US business interests, especially for the traditional energy sector. This means he will likely calibrate his policies to ensure they do not inhibit businesses.
Therefore, it is important for investors not to overreact based on personal political biases or rhetoric.
Elections – especially emotionally charged ones – make investment decisions more challenging.
However, I believe the best approach is to stay invested through the uncertainty and look for opportunities to add to diversified portfolios if we see short term weakness.
ENDS
