Beyond the Ballot: The US Election 2024

Recap on the last quarter

Despite a sharp decline in July and early August, the last quarter saw US markets clawing back losses and ending the period on a positive note. Fears of a US recession and questions about tech valuations led to some sizeable risk-off moves; however, the turbulence proved brief as a larger-than-expected 0.5% Federal Reserve rate cut and fresh China stimulus led to a significant recovery. 

 

Value outperformed growth in the broader equity market, with sectors such as Real Estate, Utilities, and Industrials at the top of the leaderboard. Information Technology and Communication Services were the weakest performers, along with Energy. As a result, this was the first quarter since Q4 2022 that the S&P 500 fared better than the "Magnificent 7" tech stocks¹.

 

Credit markets saw a further tightening in spreads as investor sentiment was buoyed by monetary easing and continued signs of a soft landing. Both investment grade and high-yield markets generated strong returns over the quarter. With investors pricing in more rapid rate cuts, it was a strong quarter for sovereign bonds². 

 

More locally in Asia, after much struggle and volatility, China saw a strong equity market rally on the back of more stimulus rollout measures². On the last day of the quarter, the Chinese index (the CSI 300) was up by 8.5% in local currency terms, marking its strongest daily performance in 16 years. On the other hand, Japan was negatively affected in early August by the hawkish perception of its new prime minister's monetary policy stance, which eased, allowing the Japanese market to regain some of its losses, ending the quarter more or less flat. 

 

This meant financial markets defied the typical weakness we've seen in September over recent years.

 

 

The US Election 2024

Arguably, the most anticipated event of the year is the 60th US presidential election. The press often focuses more on the candidates than the policies, thus fuelling emotional behaviours that may continue to drive short-term volatility. However, fiscal spending plans and regulations materially impact markets over the longer term, and it's why we take that medium- to longer-term view at St. James's Place. 

 

As the campaigning ploughs ahead, three things are becoming increasingly clear: (1) This is likely to be a close election; (2) So far, Harris and Trump's potentially large borrowing requirement is not of significant concern to the financial markets. For us, it could store potential future volatility for US government bonds; and (3) The results could have far-reaching implications for industries sensitive to regulation.

Regardless of who takes the helm, the leadership will have to deal with a significant debt burden the US has accumulated over the years, whilst significant friction in global trade and geopolitical risks will remain key challenges to overcome. 

 

Turning the page: November to January

The 2024 election results will have far-reaching consequences beyond November, particularly in the lead-up to January's inauguration.

Investors will closely monitor policy shifts, as the first 100 days will be critical in shaping the market landscape and setting the tone for economic growth, inflation management, and sector performance for the coming years. Whether it's a Harris or Trump presidency, markets will react swiftly to the policy direction set during this period.

A Harris-led administration is expected to prioritise social inclusion, climate action, and economic equity. This could boost sectors like green energy but may increase regulation on fossil fuel and technology companies.

In contrast, a Trump presidency would likely focus on deregulation, higher tariffs on foreign goods, tax cuts, and policies favouring traditional energy sectors, potentially boosting short-term market confidence but raising concerns over geopolitical stability and fiscal discipline.

Our view: Navigating the year of the election

In the run-up to political events, investors must be wary of forecasting results but prepare their portfolios for unintended risks. 

 

As always, our approach is to manage risk and think in scenarios and probabilities rather than speculate on one specific outcome. Still, we remain aware that the bond market could be particularly vulnerable at the moment given the debt and deficit trajectories of US public finances. 

 

Rising deficits and potential fiscal challenges, exacerbated by either candidate's fiscal policies, will place the bond market under scrutiny. We tend to look to valuations to contextualise these shorter-term risks with our longer-term views.  

 

The next US administration's decisions will have global ramifications, whether it's trade policy, defence spending, or foreign relations. Yet, as always, we advocate a medium- to longer-term focus, not short-term speculation.  

 

After all, history demonstrates the benefits of staying invested. Many of you may have heard that the 10 best-performing days of a market tend to follow the 10 worst-performing days of a market. As the chart below shows, a $100,000 investment made 20 years ago would have grown nearly 6x if it had stayed fully invested over the period. However, missing just the 10 best-performing days over that period would have reduced the final value by almost half – a substantial difference that underscores the potential long-term cost of trying to time the market.

 

Source: Financial Express. Data as of 31 August 2024. The stock market is represented by the MSCI World Index in USD.

 

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. 

 

Please be aware past performance is not indicative of future performance. The value of an investment may fall as well as rise. You may get back less than you invested. 

 

News and world events can provoke short-term emotional reactions and market volatility, but our investment philosophy remains focused on fundamentals, not noise. We will act decisively if asset class returns shift significantly, but our guiding principles of diversification, risk management, and behavioural discipline will continue to shape our approach.

 

 

Sources

¹MarketWatch: Turns out, the stock market can succeed without the Magnificent Seven on 3 October 2024

²Shanghai Shenzhen CSI 300 (CSI300) as of 30 September 2024