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Don’t overthink the US election

Five months ahead of the US election, the socio-political discourse has rarely been more fraught. For investors, the connection between politics and markets is natural, but evidence points to markets continuing to be largely agnostic.

19 June 2024

The culture wars in America are raging like never before. For proof, just see how the US education system has been the subject of intense conflict around issues such as gender identity, critical race theory and the 1619 Project. Sensing an opportunity, both of the main political parties have weighed in. The Republicans have increasingly focused on ‘anti-woke’ education agendas, with Florida Governor Ron DeSantis recently signing a bill mandating the education of the “dangers and evils of communism” in Florida public schools.

Meanwhile Democrat Governor Jay Inslee in Washington State signed a bill in March that included a mandate for the state’s public schools to adopt a curriculum that is as “culturally and experientially diverse as possible”. Amidst such divergent viewpoints, it is perhaps unsurprising that 2022 alone saw the publication of no fewer than three (serious) books on the prospects of a civil war in America. Today, opinion polls for the presidential race are very close, even after Donald Trump’s recent felony conviction.

According to recent data from polling website RealClearPolitics, based on the latest Morning Consult poll in early June, Donald Trump is just one point ahead of sitting President Joe Biden. For many investors, the leap from visible societal fragmentation to trouble in the economy and stock market is not a huge one to make. And yet counter-intuitively, both stock market history and the nature of the current candidates’ respective economic policies suggest that the November election result may not make much difference on market dynamics.

Stock market performance during election season - Other things seem to matter more:

Chart 1: S&P 500 returns rebased to 100 on election day

Chart 1: S&P 500 returns rebased to 100 on election day 
Source: Bloomberg, GAM. Data from 10 Aug 1992 to 01 Feb 2021.

Starting with the history, a brief analysis of the performance of the S&P 500 Index leading up to, and following, successive elections shed precious little light on the specific role of elections on stock market performance. A general conclusion from the chart below might be that US elections have tended to be favourable to stocks, perhaps because in the aftermath the uncertainty after the infamously gruelling marathons that characterise US electoral campaigns is finally over. But this seems more like a case of conflating correlation with causation. Taking each recent election in turn, 1992 saw America coming out of recession, 1996 saw the start of the technology boom, 2004 saw the market finally recovering from the bursting of said technology bubble, 2012 saw the recovery from the global financial and eurozone crises, 2016 saw the economy and markets boosted by central bank stimulus as China slowed down while 2020 saw both stimulated again by the authorities’ response to the Covid-19 pandemic.

All of these were strong fundamental drivers of positive market performance that seem more persuasive explanations than merely the relief of getting an election out of the way or even elation at the prospect of one candidate’s proposed policies prevailing over another. If investors require any further evidence that fundamentals, rather than politics, is what matters most, the instances of negative election performance do this convincingly. Exhibit one is the 2000 election. While many Democrats will remember with dismay the so-called ‘hanging chads’ controversy that led to the Florida recount in 2000 with disappointment, the stock market was far more focused on the unwinding of the boom in technology stocks, or indeed any listed company that had added a ‘’ to its name. The sell-off had already begun in March of that election year and persisted until the invasion of Iraq in 2003. Similarly, 2008’s election was set against the backdrop of the global financial crisis, overshadowing political events.

Perhaps this time will be different, with political polarisation leading to very different economic policy choices between the Democrats and Republicans, and therefore potentially different stock market outcomes. However, while the rhetoric from the two parties may give the impression of them being poles apart, the actual policy gap is far smaller than most investors would assume. Consider the trade and tariffs issue. When Donald Trump initially announced import tariffs on Chinese goods in March 2018, there was absolute shock in the economic and finance community. It seemed to mark a significant departure from the era of globalisation that had begun in the 1990s and which arguably reached its zenith with China’s admission to the World Trade Organisation in 2001. Yet, protectionist zeal now straddles the political spectrum. Always slightly suspicious of globalisation and its effect on American manufacturing, the Democrats did not outright reverse the Trump-era tariffs. In this campaign season, Mr Trump has now promised 60% tariffs on Chinese goods and 10% on anything coming in from the rest of the world. Following a policy review in May, the current White House proposes to raise tariffs on Chinese semiconductors and solar cells to 50%, on syringes and needles to 50%, on lithium-ion batteries to 25% and on electric cars to 100%. You now have to squint to spot any real differences between the two sets of policies. Investors believing in the positive growth qualities of globalised free markets could be forgiven for not knowing which candidate to root for in November.

Bigger and bigger deficits are the base case

The similarities don’t end there either. Take the US budget deficit, which has now ballooned to nearly 6% of GDP as at the end of March 2024, according to Bloomberg (3% is generally considered a sensible limit). The potential negative implications are significant. A high budget deficit means that the US Treasury has to issue more debt and, along with potential fears that a complicit Federal Reserve could just allow it to be inflated away (the US Treasury is unlikely to default technically), this pushes up long term interest rates which in turn could depress equity valuations. Yet, neither party seems especially fussed about addressing the expanding deficit. For the Democrats, pandemic stimulus and demand-boosting initiatives such as the Inflation Reduction Act and the CHIPS and Science Act are signature policy initiatives which demonstrate the power of centralised government to improve the lives of ordinary Americans. Conversely, in the event of a Republican victory, the tax cuts brought in for individuals and businesses in 2017 would almost certainly be extended in the belief that unshackling individuals and enterprises from an over-reaching federal government is the best route to strong economic growth and therefore better lives for all. Thus, while both parties may have different tax and spending agendas reflecting their respective ideologies, both sets of policies are ironically united by the undesirable outcome of an ever-widening budget deficit.

Chart 2: US budget deficit versus 10-year minus 2-year US Treasury yield spread

Chart 2: US budget deficit versus 10-year minus 2-year US Treasury yield spread 
Source: Bloomberg, GAM.
Data from 31 Dec 1979 to 31 Dec 2034.
*Data from 2024 to 2034 represent Congressional Budget Office (CBO) forecasts for the US budget balance
Past performance is not an indicator of future performance and current or future trends.

All of these point to some unexpected conclusions. Firstly, economic and market fundamentals are still likely to be the most important drivers for markets, by some way. Even in the event of a market crisis in the coming months, history suggests that a mere election won’t make much difference (see 2000 and 2008). Similarly, a continued rally from here shouldn’t be undone by a single presidential contest either (see 1992, 1996, 2004, 2012, 2016 and 2020). Yes, it is true that 2024’s contest is unlikely to offer the prospect of lower import tariffs and smaller fiscal deficits, and in theory, these should be of at least some concern for the reasons explained. However, since neither has been an impediment to the US stock market’s stellar performance so far (the S&P 500 is up a cool 53% from the end of September 2022 to 5 June 2024), it is hard to make the argument that they will suddenly become a problem on the 4 November. This suggests that on balance, investors should not let even this most brutally contested of elections affect their investment decision-making. Amid the spectacle of this year’s contest, they might perhaps be grateful of this rare consolation.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.

The S&P 500 Index is a stock index tracking the performance of 500 of the largest, publicly traded companies in the United States.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.

This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the US market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.

In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.

Julian Howard

Chief Multi-Asset Investment Strategist
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