Wealth Insights | Weekly Market Analysis | Economy/Politics
Weekly Market Analysis - US Elections – Looking for Risks Hiding in Plain Sight
Posted on3 Things to Know
The US President Does Not Drive the Economy (Alone)
The last US President to preside over a net decline in US equities was George W. Bush. His second term ended in January 2009, just after the sub-prime mortgage collapse, a crisis his administration had a limited role in creating. Investors appear to ascribe too much power to US presidents to drive the economy and returns – at least while “checks and balances” remain.
Fear Factor: Tariffs and Deportations
Investors have reason to fear a large rise in US tariffs, even as the impact of 2018 tariff increases were remarkably muted. “Mass deportations” could be an even more disruptive policy depending on their extent and implementation. One irony may be that Democrat policies toward immigration could be more positive for business profits and less supportive for lower income workers (all else constant).
The Citi View: Downside Risks if Either Party has Full Control
With this in mind, we can see some downside risks for the US economy and markets if either of the two major US candidates drive through their party’s full platform unchecked.
Summary
Events of the past two weekends have shocked the world. A US President (current or former) was shot for the first time in 43 years. Moreover, the attack came while Donald Trump, the former US President, was campaigning for reelection. Joe Biden, the sitting US President, decided not to seek reelection with a little more than three months left before election day. The latter event has shifted much of the election narrative, raising uncertainty as markets now view the race as more competitive with Vice President Kamala Harris running in Biden’s place.
As we’ve said before (please see our CIO Bulletin of June 22), investors will have to live without knowing the US election outcome with any certainty. Congressional results are even less predictable. While there are multiple factors to consider, these events fit a historic pattern of rising volatility – and less robust market confidence – in the run-up to the election result.
Portfolio considerations
- President Biden’s decision to leave the race has lowered investor certainty of a “red sweep.” The chance that Congress and the White House will be unified under one party – to either cut taxes or spend unchecked – has been reduced.
- We loathe making portfolio shifts based on unreliable polling data. Given a history of rising market volatility in the summer before US Presidential elections, short-term hedging costs for portfolios remain attractive.
- We remain concerned that US firms producing goods in China for export to the US have vulnerabilities. Some are the largest American companies. Profitable US small and mid-cap growth companies – with greater domestic exposure – might help diversify this risk.
Source: Bloomberg as of July 23, 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.
The US President Does Not Drive the Economy (Alone)
Patient investors might be comforted by the fact that US Presidents take far more credit for economic outcomes and market returns than they deserve. The last US President to preside over a negative return for US equities during his tenure was George W. Bush. He had the misfortune of ending his administration in January 2009, two months before the historic bear market of 2008-2009 reached a bottom. The housing boom and sub-prime mortgage bust wasn’t arrested by his administration, but it wasn’t wholly his creation either.
Investors also often underestimate the ability of the economy to adapt to change. Europe’s adaptation to a historically-severe energy supply disruption from Russia is just one recent example. We believe the anticipation of new US tariffs is already impacting trading patterns in a similar attempt to adapt. With that said, we can’t help but worry that some risks are hiding in plain sight if certain policies become a reality.
Fear Factor: Tariffs and Deportations
While both candidates highlight the importance of slowing the large migrant populations moving north, the rhetoric is starkly different. Former President Trump cites a straightforward rationale to protect American jobs and bolster national security. This is contrasted with a more moderate approach from Harris who is interested in a path to citizenship, reinstatement of DACA (impacting children brought illegally to the US), and mitigation of the underlying causes of mass migrations from Central and South America.
These two policies have different implications for labor markets, business profits, and real economic growth. The strong immigration restrictions of former President Trump would likely help maintain some of the wage gains at the lower end of the education/skill spectrum in the US. In contrast, the more immigration-friendly policies of Vice President Harris would likely put more negative pressure on wages at the lower end of the spectrum (Democrat administrations have generally attempted to mitigate this with proposals to increases the federal minimum wage. State-level data generally suggest a negative impact on business costs and employment.
Trump’s trade policies, particularly his tariff strategy against China, aim to protect domestic industries from foreign competition. While these tariffs were designed to rebalance trade relationships and support American manufacturing, they also risk inflating import costs and, consequently, consumer prices. Nonetheless, the scale of the proposed tariff – 60% on Chinese goods imports and 10% for the rest of the world – would be unprecedented in modern times. The recent experience of producers passing price hikes on to consumers during the pandemic raises the probability of a larger impact than 2018. This makes Trump’s tariff strategy riskier for markets in our view.
The Citi View: Downside Risks if Either Party has Full Control
It is unlikely that there will be a clear-cut stock market favorite candidate. Instead, some sectors and subsectors will be favored with a win by one candidate or the other. With the poor track record of polling and political forecasters in recent years along with election surprises in France, India, and Mexico in the last few months, we would emphasize a durable and diversified portfolio designed to thrive in any potential political environment rather than attempting to forecast the US election.
