Wealth Insights | Weekly Market Analysis | US | Asset Allocation | Economy
Weekly Market Analysis - Prepare to Make Volatility an Asset
Posted on3 Things to Know
Expect Swings on US Election Evening
In the evening of the past two US presidential elections – featuring the same candidates of 2024 excluding Joe Biden – financial markets saw large moves and, at moments, false assumptions about final results. S&P 500 futures averaged a 5.9% price swing. US 10-year Treasury yields moved 27 basis points and the broad US dollar gained or lost about 2.5%.
Market Gains May Depend on Who Wins Nov 5
There is no guarantee that markets will move markedly in the evening of November 5th, 2024 or repeat the general tendency of rallying in “relief” once election uncertainty ends. It is clear, however, that Trump’s policy proposals – income tax cuts and increases in tariffs – are consistent with domestic “reflation” and a “toll” on foreign markets. Domestic-focused equities have rallied with Trump’s polling. Non-US markets have rallied with Harris’s.There is no guarantee that markets will move markedly in the evening of November 5th, 2024 or repeat the general tendency of rallying in “relief” once election uncertainty ends. It is clear, however, that Trump’s policy proposals – income tax cuts and increases in tariffs – are consistent with domestic “reflation” and a “toll” on foreign markets. Domestic-focused equities have rallied with Trump’s polling. Non-US markets have rallied with Harris’s.
Record Corporate Profits Likely Regardless of Outcome
As fears of a harder landing have been erased, US We see new record highs for US corporate profits in 2025 regardless of the US election victor. However, the interest rate, foreign exchange, and industry outlook will indeed be impacted by US election policy choices.
Summary
By early next month, much of the world will be gripped in US election frenzy. We suspect that the “power” of the two US candidates’ words are an increasing influence on markets now. The correlation between key market variables and the candidates polling has increased since July.
Markets swung wildly in the past two US presidential election nights as polling data drove traders to sometimes inaccurate conclusions. We don’t believe long-term investors have any advantages here. Uncertainty may be over quickly. Alternatively, it could take weeks for complete results in a very close election. However, any increases in implied volatility – a spike in uncertainty – is likely to be short lived (see chart). For suitable investors, this could improve investment entry points or lock in immediate income.
Portfolio considerations
Because Trump and Harris economic policies are so different, if polls remain tight until election day, we do expect a large reaction to election results. A severe spike in implied volatility could be a potential opportunity to generate income or take new positions as we last did in early August (see the August GIC Statement). Our asset allocation has been overweight US assets in both equities and bonds. While election results may be unpredictable, any overreaction could offer potential opportunity.
Source: Bloomberg, October 16, 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Expect Swings on US Election Evening
Markets swung wildly in the past two US presidential election nights as polling data drove traders to sometimes inaccurate conclusions. We don’t believe long-term investors have any advantages here. Uncertainty may be over quickly. Alternatively, it could take weeks for complete results in a very close election. However, any increases in implied volatility – a spike in uncertainty – is likely to be short lived. For suitable investors, this could improve investment entry points or lock in immediate income.
The past two election results – first for Trump, then for Biden – generated opposite results for domestic and international equities. This is right in line with the recent vacillation of polls and market performance. While we can’t predict the election, what will be key for us is if investors misprice assets, taking any potential impact too far. We’ll need to be patient now, but also ready.
Market Gains May Depend on Who Wins Nov 5
Trump has campaigned on universal tariff increases, a 60% tariff on imports from China, and markedly more restrictive immigration policies. Increasingly, his campaign has included a longer list of potential domestic tax cuts (these are domestic demand-boosting policies with restrictions on foreign-sourced supply). While some of these policies will face Congressional and legal hurdles, a Republican sweep of Congress appears mathematically higher in probability than a Democrat sweep as far more Senate Democrats than Republicans face elections next month.
At present, a “blue sweep” of the White House and Congress would be a large, market-moving surprise. Yet any and all potential election outcomes are likely to move markets in our view, given still close polling. Investors and traders simply can’t depend on any particular results with confidence.
For our global asset allocation, we don’t expect to immediately make changes in the frenzy of fast markets. Opportunity could arise if markets exaggerate the positive or negative impact of particular policies implied by election results. Trade policy uncertainty may move up or down swiftly as such policies depend most significantly on the choice of President. Meanwhile, the Fed’s expected easing steps have yet to flow through fully to declines in the US dollar and boost non-US asset prices measured in the US currency. This is likely because of trade policy uncertainty and the potential for Republican-led tax cuts to generate a higher rate path from the Fed than Democrats would.
Record Corporate Profits Likely Regardless of Outcome
Our equity market view remains positive overall. US corporate profits have reached record highs in 2024 and we expect new records in 2025. Analysts, as usual, bias down their immediate EPS forecasts and bias up the future estimates. Apart from a very brief contraction in the pandemic, both Trump and Biden presided over growing corporate profits and records each year. The composition of market performance, however, suggests which industries the candidates’ policies favor.
Equity investors will have to drown out the political noise over the next few weeks as they digest 3Q reporting season, which kicked off last week with the big banks. After a “beat and cut” 2Q earnings season which catalyzed significant downgrades to 3Q expectations, most firms should have no problem comfortably exceeding top and bottom line estimates for the quarter just past (see FIGURE 7). In fact, consensus expectations are for a 1.4% quarter-over-quarter decline in profits, which is inconsistent with solid macro data we received throughout the quarter. Indeed, tracking data from the Federal Reserve Bank of Atlanta predicts a 3.4% annualized growth rate for US real GDP in the quarter.
While predicting earnings beats is the easy part, more importantly for post-earnings performance will be corporate guidance. Equity investors are an impatient bunch, so key bellwethers that report early on in earnings season will likely set the tone for the rest of their industries. Large banks set a positive tone for the sector, while the reaction to early tech reports has been more mixed.
