U.S. Presidential Election 2024
November 5, 2024
Topic of the week:
For months now, alarmist rumblings have been echoing in the financial markets about the risks that may arise depending on the outcome of the elections to be held today, November 5, in the U.S. But the truth is that no fear has been perceived in the U.S. stock markets so far this year, and proof of this is that we are close to record highs in most U.S. benchmark indices. Although there have been some corrections, these have been one-off (in some cases significant but reversed in very few sessions) and caused by fear of macroeconomic data that could have suggested a sharp slowdown in the world’s leading economy, rather than the composition of the future government.
As of today, consumption, employment and economic growth in the US are in good health (there is a slowdown, but in an environment of growth). In addition, the corporate results season currently underway is evidence of the strength of the profits and balance sheets of large companies, which is conducive to the good performance of the stock markets. Having laid the foundations for the starting point, i.e. a very solid U.S. economy, the main issues of concern for most financial analysts after the elections are as follows:
- International trade relations. A Trump victory could further hinder the exchange of goods, with trade with China and secondarily with Europe being particularly affected. Harris, as vice president, has not eliminated tariffs on China, in fact, she has increased them throughout the legislature. The direct consequences in both cases will be increased geopolitical tension and a likely increase in inflation.
- Tax framework. This is the issue on which the two candidates are farthest apart. Harris wants to implement a significant tax increase on large corporations and high net worth individuals that would allow him to finance, in part, the significant increase in spending. Trump would do the opposite, a reduction in corporate taxes, that is, a lower tax revenue that would be financed with the increase in tariffs and additionally would carry out significant adjustments in spending items. The first case would mean a punishment for listed companies in the face of an upward reaction in the stock markets in the event of a Republican victory.
- Immigration. Trump, as he has been in the past, is being very aggressive on this issue and proposes to deport 10 million people without papers. This measure in an environment of full employment such as that enjoyed by the U.S. could be a shock to the supply chain and at the same time cause a significant increase in wage costs. Harris, for his part, has not expressed himself forcefully on this point.
- Public deficits. This is probably the issue that worries experts the most. The strong growth in the level of debt in the US in recent years has led the public deficit to exceed 125% of GDP, a circumstance that has also occurred in an environment of rising interest rates, which further aggravates the situation. An example that demonstrates the magnitude of this growth is that spending on debt interest payments has reached the same level as defense spending. In 2015 these items accounted for about $550 billion and $210 billion respectively, compared to more than $800 billion for both items now.
With this starting point, the estimates made to the proposals of the two candidates would result in the Democrats increasing the public deficit by another 2 trillion dollars over the next 10 years, compared to 4 trillion dollars for the Republicans. In both cases, the sharp increase in debt to be issued to finance the deficit could be a key factor playing an important role in long-term interest rates, which could remain at higher levels than expected.
This is not the first time that elections have pitted such opposing candidacies against each other, but what has happened to financial markets in the past? The truth is that the best performance of the stock markets has always occurred, regardless of the governing party, when there is a divided majority, i.e. when the US Congress is divided, the Senate is dominated by one party and the House of Representatives by the other. This situation favors the gestation of consensual measures that make extremist proposals less likely to succeed.
It is worth noting, for those who like statistics, that the post-election year is not the year with the best stock market returns. The S&P 500 rises by an average of 11% in the first year of office compared to the average for non-election years of 11.6%. Moreover, that first year is statistically speaking only the third best, being the third best presidential term year historically to generate the best returns. We conclude with one last piece of information in this regard: the last year of a presidential term, let’s remember, regardless of the party in government, has historically generated capital gains of 2.4%. In 2024 to date the S&P 500 is over 20%.
From a financial point of view and starting from a simplistic approach, the US dollar would emerge stronger with a Trump victory (probably already reflected in the current price), versus some weakness in the event of a Kamala Harris victory. Interest rates will be less affected with a weak government while if Harris wins and controls Congress we should see a steepening of the interest rate curve, as if Donald Trump wins and gains control of both houses, in both cases as a consequence of the expected higher budget deficit.
On the stock markets, a strong Trump victory would initially boost stocks, and we could see declines if it is Harris who dominates politics. In the event of a government without congressional control, share prices will be at the expense of the results and forecasts of future corporate earnings, but what seems certain is that volatility, under this scenario, will increase in the sessions following the vote and then normalize.
We leave for last the scenario that could generate the greatest uncertainty and that is not totally ruled out. This scenario would occur in the event that the winner of the elections is not known within 48 hours after the voting. We are aware of the equality between both candidates in many states with an important electoral weight, which would swing the government in favor of one or the other candidate, and therefore we could see endless recounts, or even challenges that would lead to the intervention of the courts. Under this scenario, uncertainty could weigh on investment decisions, and it would not be unusual to see an outflow of funds from equities into safe-haven assets such as gold or higher credit quality fixed income.
We will start to find out today.
The beacon of the markets:
Widespread falls in world stock markets in the week before the US elections. The strong revaluation accumulated in the year together with less optimistic forecasts for the coming quarters by some of the components of the Magnificent 7, have led to a small profit taking in equities. The S&P 500 and the Euro Stoxx 50 were down just over -1.30% at the close on Friday, November 1, the Nasdaq was down -1.57% and the Ibex posted a minimal gain of +0.26%.
Fixed income continues to be impacted by the ongoing change in expectations regarding future moves by the Fed and the ECB. Macroeconomic data, especially US data, is very erratic in the sense that the same indicator suggests strength one month and weakness the next, but overall what seems clear is that the US economy remains strong in terms of employment, growth and demand. Although in a slowing phase, what the macro data show is sustained economic growth. Adjustments in estimates regarding the next steps to be taken by monetary policymakers have led to a rise in bond yields. Thus, the 10-year Treasury yields 4.36%, the Bund 2.41% and the Bono 3.36%, i.e. +13, +12 and +5 bps respectively.
In the alternative markets, we have seen how the interest rate hike has outweighed the uncertainty of the US election result, and gold fell 0.46% during the week. However, after setting a new all-time high at 2,801.80USD/Oz. On the other hand, the reduced fear of a direct conflict between Iran and Israel has allowed the price of crude oil to approach again the 70USD/b level, closing at 73USD/b, which represents a weekly decrease of 3.88%. However, we started this week with oil price increases for two reasons: Iran has once again charged against Israel on the one hand, and on the other, OPEC+ has decided to delay to January the production increase planned for December.
The macroeconomic data released in the last few days have followed the trend of the last few months: positive surprises accompanied by negative surprises. China showed a slight recovery in the manufacturing PMI, but was impacted by the services data, which did not meet expectations. In Europe, GDP beat forecasts and rose to +0.9%, but CPI went from +1.7% in September to 2% in October, and core inflation, for which a slight decline was expected, remained unchanged at 2.7%. Finally, the unemployment rate fell to 6.3%, one tenth of a percentage point lower than estimated. In the US, GDP fell to 2.8%, in the first official reading of the third quarter figure, compared to the previous 3%. On the employment front, the ADP survey data was clearly better than expected and better than the previous data, but JOLTS and non-farm payrolls came in well below expectations, 12,000 versus the 106,000 estimated and 233,000 in the previous month. In any case, the unemployment rate remained at 4.1% as expected. Finally, we would like to highlight that the PCE (the main indicator followed by the FED to anticipate the future evolution of inflation), remained at 2.7%, one tenth above what analysts had estimated.
For the current week, two events stand out above all others: firstly, the US elections to be held today, and secondly, the FED will decide on Thursday whether or not to cut interest rates in the USA. In China, we will be watching the PMIs and inflation data. Europe will update its PMIs and retail sales data.
Regarding the evolution of the earnings season, it is worth noting that 350 companies in the S&P 500 have already presented their results with an average EPS growth of 7.8% compared to the 5.1% expected before the start of the presentations. Seventy-five percent of the companies are beating forecasts and only 17% are reporting below expectations.
The quote:
And we say goodbye with the following quote from Kalu Ndukwe Kalu Nigerian-American political scientist:
“The things you do for yourself disappear when you are gone, but the things you do for others become your legacy.”
Summary of main financial assets performance (4/11/2024)
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This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information at the date of issue of the report and is subject to change without notice. Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.
The information contained herein has been obtained from public sources believed to be reliable, and while reasonable care has been taken to ensure that the information contained herein is neither uncertain nor unequivocal at the time of publication, we do not represent that it is accurate and complete and it should not be relied upon as if it were. Portocolom Agencia de Valores S.A. assumes no responsibility for any loss, direct or indirect, that may result from the use of the information provided in this report. Past performance of variables may not be a good indicator of future performance.