Wealth Insights | Weekly Market Analysis | US | Asset Allocation
Weekly Market Analysis - Which Markets Will Move? US Policies Matter
Posted on3 Things to Know
November is Too Close to Call
Polls and prediction markets suggest a very close US election on November 5. History suggests no one should “bank” on knowing the results. As we highlighted two weeks ago, one party uniting the House, Senate and Presidency seems somewhat unlikely. Only a strong “sweep” of red or blue could radically alter the course of domestic tax policy (please see our September 14th CIO Bulletin).
Both Red and Blue Have Overseen Economic Expansion
Both parties have seen a history of economic expansion and solid US equity returns on average since WWII. The last US President to preside over a US equity market drop during the course of his administration was George W. Bush, who had the misfortune of ending his second term on Jan. 20, 2009.
Trump or Harris? The Presidency Matters for Markets
With this said, the “mere” choice of President may be a pivotal factor in market sentiment and preference for US vs non-US assets. One can look at tariffs – the favored policy of Trump – as a potential disruptor. Tariffs coupled with sizeable tax cuts could sway the course of the Fed and boost the US dollar. On the other hand, a Harris win would represent a status quo which would likely provide short-term relief for non-US asset markets and send the US dollar drifting lower.
Summary
We’ve noted many times that today’s US presidential candidates of both parties have presided over historically large share price increases. The annualized return for the S&P 500 over the course of the Trump/Pence administration was 16.4% while Biden/Harris has averaged 13.1% to date. This can be credited significantly to the 10.9% annualized rise in S&P 500 earnings per share over the last eight years, not the person sitting in the White House.
Yet US Presidents do wield much power, and can change market expectations, particularly over the short term. The foreign policy and mix of domestic polices of Harris or Trump (presented in alphabetical order) are more than enough to sway the expectations of global markets. Today, we’ll discuss how and why.
Portfolio considerations
US equities have outperformed the rest of the world for 15 years with valuation differences mostly escalating. If US trade and tax policy don’t change, Fed rate cuts could ease a strong US dollar, benefitting the remainder of the world (as an example, please see our latest Asia Strategy: China Finally Begins to Fight Deflation). Conversely, with Fed easing so strongly embedded in bond market valuations, the chance of a snap back in the US dollar seems high if US trade and tax policies follow the course of Trump’s platform.A variety of other trades such as green energy, domestic small caps and regulatory beneficiaries (banks) will vacillate on Harris/Trump prospects. Even if one doesn’t take a position in these assets, a sizeable part of core, global portfolios will likely pivot on which leader is chosen Nov. 5.
Source: Bloomberg, RealClear Polling, September 25, 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.
November is Too Close to Call
Polling data for the US election shows a tight race. The unusual qualities of the US electoral college make it fraught for investors to take a strong view of the outcome. The close election makes it likely that the results on November 5 will cause certain asset prices to move significantly.
One of the clearest observations of the campaign period thus far is that non-US share prices can swing sharply with the prospects for Harris or Trump. The discrete events that changed polling data and prediction market odds in favor of Harris or Trump drove significant equity market gains or losses in large regions of the world.
Why would this be the case? As we noted, share prices rose through the economic expansions of both administrations, though interrupted briefly by the pandemic shock late in the Trump administration. Yet Trump’s tariff increases – mostly focused on China at the time – caused great volatility spikes, more so outside the US. While it is true that US importers pay the customs duties (taxes) on imported goods, equity and foreign exchange markets can reduce the value of a foreign producer’s business. Tariffs change the economics of international trade.
When looking at both the Fed’s dot pot and the futures market, they both coalesce around an ultimate “neutral rate” of about 2.75-3% for Fed Funds at some point in late 2025 or early 2026. The US Treasury market has already priced in much of this potential shift in yields lower, so since the time of the Fed’s previous dot plot back in mid-June, the yield curve has declined considerably. Most of the decline has occurred in the “intermediate” portion of the yield curve (2-7 years), an area we have long favored for investors. The 2y yield, for example, has declined by more than 100bps, while 5y yields have declined almost 80bps and the 10y has dropped by about 50bps.
Both Red and Blue Have Overseen Economic Expansion
The past 15 years have been one of unusually strong US outperformance on a sustained basis. US equity market capitalization has risen to a record 65% of the world measured in a historically strong US currency. During the past century, it was rare for outperformance to persist more than a decade. With this outcome, investor portfolios throughout the world have become “US biased.” US investors who favored their home market outperformed those who diversified across the world. But is this a risk for their portfolios going forward? At ever-higher levels, one would think so.
Trump or Harris? The Presidency Matters for Markets
To be clear, the US equity outperformance hasn’t been driven on some irrational bias and profits of US firms have outgrown non-US. And as we showed last year, one can easily find examples of markets strongly rewarding any firm globally that outgrows peers. A Danish drug maker was one of last year’s strongest equity market performers among global large caps, for example. Yet that was not true for Europe as a whole, as the region’s EPS gains lagged.
Critically, faster EPS growth rates for US firms are strongly embedded in expectations for the future. Therefore, outperformance from here requires raising that expectation further. The valuation of US shares is at a historically high premium to non-US shares.
So, will the US only outperform other regions? It’s possible that the US could gain further. Like 2018, a trade war shock might sink all markets, but the US less for a time. As we have discussed, the strong growth performance for US technology shares in the decade to date is mostly behind US/Non-US valuation differences. China’s polices are largely behind its weakening corporate performance (see our September 14th CIO Bulletin). These combined boosts to US relative performance might fade.
While we believe it is unlikely, Harris has proposed a somewhat higher US corporate tax rate and other forms of higher capital taxation. A stronger regulatory hand could also restrain US equities at the margin. We say this while overweight US equities, albeit expressed through segments with lower valuations than large cap US tech. There are no guarantees that the US election outcome and presidential policies will be the decisive factor that changes the relative return picture for US and non-US assets. But at a record high for the US share of global markets, it is critical to keep an eye on what might change a powerful driver of portfolio performance.
