Thoughts in the lead up to the US Election

 What might happen?

It was a year ago that markets got wind of the possibility that inflation was under control, that interest rate increases were done, and that there may not even be a recession. A rare 'Soft Landing'.

Over the year from 31 October 2023 to 30 October 2024, various indicators have performed as follows:

• Nasdaq 100                                         40.5%
• S&P 500                                               36.5%
• ASX 300                                               25.3%
• Global Bonds                                         8.4%
• Term Deposits                                       5.1%

It’s been a very good year, clearly.

‍The key questions now are – who will win the election this week, and how will markets respond?

If markets are substantially efficient and - at a high level - reflect all available information and prevailing sentiment at a point in time -  then Trump will be the winner.

 How do we know?

 Well, throughout October, as polls, bookies and early voting have indicated that Harris has lost her early lead – US equity markets have run up, bond markets have declined, Australian shares have been flat; and Gold and Bitcoin have had a good run.

 The Trump policy platform is built on:

 US government (fiscal) debt now stands at US $35.8  trillion (122% of US GDP). This level of debt is not unprecedented, but it is not under control. The US government spends more each year relative to what it receives in taxes, and so fiscal debt is growing each year. This position is not sustainable in the long run. What the US needs is a government that increases taxes AND reduces spending.

 The market is suggesting that Trump’s policies – if he wins – will be bad for US government debt and the status of the USD as the world's fiat currency. So Gold and Bitcoin have done well over the last month, while bonds have declined.

 But a win by Trump is far from a given. 

 So, what might happen this week ?

 The race is so tight that it seems a clear winner may not be evident until a good few days after the election. The longer the uncertainty associated with the winner - especially if Trump pre-empts and claims victory - the more volatile equity markets will be. 

 If Trump wins:

• US shares could continue their run  (recalling the period after Trump’s 2016 victory, and his announcements re company tax reductions and deregulation), while Australian shares would be likely to struggle;

OR

• Applying the old adage of ‘buy on rumour and sell on fact’ - the market could re-interpret the fact of his win as being bad for the global rules-based-order and western democracies generally, bad for inflation, and bad for global trade  – resulting in a loss of confidence and equity market volatility:

​​AND

• Irrespectively, over the course of the Trump presidency – as the US Fiscal debt grows, we will see investors demanding a higher premium (higher interest rate) associated with US government borrowings.

If Harris wins:

• US shares could lose the gains of the last month (6-8%), Australian shares and the AUD may recover, and bonds could perform well. There would be less risk to the inflation outlook generally.
• A more ‘normal’ market rhythm would likely apply, with markets responding to market fundamentals, as they reveal themselves (inflation, economic growth, unemployment etc).
• Irrespectively, while Harris’ policies may result in a slower rate of growth of US fiscal debt, the market will in time apply its discipline (Harris or Trump); much as it did when Liz Truss tried to radically cut taxes without any spending cuts – resulting in a ballooning UK debt outlook. Even the great USA is not immune to market discipline.

The Harris policy platform is built on:

 In 2016, we were convinced Trump would win and that that was going to be very bad for markets. He did win, and after a brief drop in markets - by the end of November 2016:

• S&P 500                                               +8%
• Nasdaq 100                                         +5%
• ASX 300                                               +3%
• Gold                                                       -6%

So even having called the outcome, we would have got the market direction wrong - had we acted on our unease.

The key thing to keep in mind is that the President has limited executive powers. There remains Congress, the Judiciary and 52 State governments to hold the Executive in check. And even with the possibility (probability?) of a Trump second term - equity markets have not fallen out of bed in the lead-up. 

 For more reading click on the link below:

 Presidential elections matter but not so much when it comes to your investments | Vanguard

 Should you have any queries please do not hesitate to contact us. 

Warnings:

The information provided in this communication is of a general nature only and does not take into account your personal objectives, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own circumstances and seek independent financial advice from a qualified professional. 

Past performance cannot be relied upon as a predictor of future performance.

Our outlooks are not a prediction. Actual outcomes may be different from those suggested in this commentary.‍