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The lead-up to U.S. presidential elections are frequently volatile affairs. Financial markets attempt to digest each candidate’s policy priorities, which sectors of the economy stand to benefit, and constantly adjust to incoming poll data. With the November 2024 election rapidly approaching, to say that the past few weeks have been turbulent would be a colossal understatement.
Beginning with the faltering performance of Joe Biden during first presidential debate in late June, we’ve since witnessed an assassination attempt on Donald Trump and Biden’s stunning withdrawal as the Democratic nominee with less than four months left until the vote. We frequently argue that in investing, economics “trump” politics, but that does not mean that elections are inconsequential. With the return of Trump to the White House looking increasingly likely, we ponder over the investment implications below.
Global stocks and bonds generally performed well during Trump’s tenure. Despite an equity market crash during the first quarter of 2020 as the Covid pandemic took hold, the MSCI All-Country World Index gained over 60% in Canadian dollar terms during the period. Bond investors initially panicked in response to the Trump victory, with yields spiking on fears that lofty infrastructure spending (“build that wall” chants at Trump rallies spring to mind) and tax cuts would blow out the fiscal deficit and stoke inflationary pressure. These concerns proved to be overblown, and global bond yields resumed their multi-decade downtrend in late-2018. The U.S. dollar bounced around during the four years but ended approximately 5% and 6% lower versus the Canadian dollar and a trade-weighted basket of international currencies respectively.
That is not to say that it was all smooth sailing. Trump’s trade war against China created significant deadweight economic losses for both sides. Deregulation and tax cuts were a major boon for corporate America, but also set the stage for trouble down the road. The rollback of Dodd-Frank financial sector regulations in 2018 are partly to blame for the U.S. bank failures witnessed in 2023. Lower tax revenues left the government in a weaker fiscal position to dole out stimulus payments during the Covid pandemic, although that clearly did not act as a major impediment considering the significant outlays that were made. Lastly, Trump’s browbeating of multilateral institutions had a destabilizing impact. Trust in the U.S. as an influential global leader and proponent of democratic values, key trade partner, and military ally all faltered somewhat during his presidency. It is likely no coincidence that heightened geopolitical tensions and an acceleration of deglobalization trends have followed.
As noted in our recent 5 Minute Macro: Is the Trump Trade On?, Trump’s unpredictability can fuel volatility, but his victory would likely not have a destabilizing impact on financial markets as he is now a known entity. A continuation of low tax rates, a less onerous regulatory environment and a mercantilist bias towards a weaker U.S. dollar should all be supportive of economic growth and corporate earnings. However, the vulnerability of technology-centric U.S. mega-caps is rising. Already priced for near-perfect outcomes, Trump has described them as “too big, too powerful” and almost certainly holds a grudge for being kicked off numerous social media platforms. Per the chart below, as Trump’s electoral odds surged, sharp market rotations from growth to value and from large-cap to small-cap stocks have occurred.
The continued strength of the world’s largest economy and a weak U.S. dollar would be a potent combination for cyclical assets such as international and emerging markets stocks and commodities. A broadening of performance away from U.S. mega-caps would be a very healthy development for global equity markets. Hostile trade actions will be a key risk to watch, particularly for China, which has become a bi-partisan nemesis in the U.S. While a second term for Trump is far from guaranteed at this point, a raucous few months leading up to November is a near certainty. Stay tuned!
Here’s a look at our investment stance for the coming quarter.
The opportunity cost of holding cash is increasing, as yields will be pressured lower by central bank interest rate cuts. Simultaneously, risk assets look more attractive as falling policy rates lower discount rates, support domestic demand, and tend to drag down longer-term yields. Cash has been drawn down and is now below benchmark in client portfolios.
Despite an improvement in the overall outlook for bonds, the risk/reward ratio for longer-term bonds remains unattractive. Inverted yield curves in many developed bond markets offer poor risk compensation and are vulnerable to a re-steepening. Short duration fixed-income positioning has been maintained this quarter.
Despite pockets of overvaluation, broadening global growth momentum should be supportive of corporate earnings. Risk appetite has picked up this year, but there is still an abundance of defensively-positioned capital yet to re-enter global equity markets. We remain overweight equity exposure in client portfolios.
Indian assets sold off in response to the surprisingly weak performance of incumbent Prime Minister Narendra Modi’s Bharatiya Janata Party in the general elections, which concluded in early-June. Despite a hit to Modi’s ability to implement reform measures, we see little risk to India’s growth trajectory, which appears to be broadening out from public investment to private consumption.
David Kletz, CFA, is Vice President and Lead Portfolio Manager at Forstrong Global Asset Management. This article first appeared in Forstrong’s Insights Blog. Used with permission. You can reach David by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at dkletz@forstrong.com.
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Content © 2024 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/cyano66
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