Fundamentals matter more than politics for markets
Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- Fundamentals matter more than politics for markets
- Economic status quo A benefit following a potential Harris win
- Tax cuts and less regulation a benefit following a potential Trump win
Get ready to ‘roll back’ the clocks! That’s right, Daylight Savings Time (DST) ends this weekend. This twice-a-year ritual is followed by every US state (except Arizona and Hawaii) and nearly 70 countries across the globe, but not everyone supports it. The good news: mornings will be a little brighter and we all get to enjoy an extra hour of sleep (and we will need it with the upcoming week!). The bad news: the nights will feel much longer. While the time change affects everyone differently, most people need a few days to a week to fully adjust. And just like we shake off the DST blues in relatively short order, we may experience a similar after-effect once next week’s election is behind us. Sure, some voters may initially be disappointed (particularly with the presidential race a toss-up), but it’s important to maintain perspective. And remember, regardless of the party in power—Republican or Democrat—or whether we have a unified or split government, both the economy and equity markets have, for the most part, thrived and moved higher over time.
While it is easy to get emotional around elections, it is important to remember that there is no statistically significant relationship between the election results and the impact on the economy and financial markets. Sure, there are disparate opinions about the path of the country going into the election, but historically the country comes together after the election. In fact, the S&P 500 has been up 2% on average between election day and inauguration day and was positive 82% of the time dating back to 1980 (11 elections). Why? Because Americans by nature tend to be optimistic, forward thinking, and rally behind their new leadership. But as time goes on, the story of the equity market is less about the composition of DC and more about fundamentals—economic growth, valuations, earnings, and monetary policy. While no one knows for sure how the market will react post-election, below are potential narratives that could positively impact the equity market.
- The Positive ‘Spin’ of a Harris Victory For the Equity Market and Economy | A Harris presidency could bring about the optimism of:
- Economic Status Quo—Relative to history, the economy is on solid footing with GDP notching a 2.8% growth rate in 3Q, after 3% growth in 2Q. With the economy on track for a soft landing, unemployment near historical lows, and inflation likely to be below the Fed’s 2.0% target by April 2025 (allowing the Fed to continue its easing cycle), maintaining the current political landscape (without the potential downside of tariffs) could be viewed as beneficial to the economy. And with no major increases in tariffs, inflation won’t be an issue.
- Market Status Quo—US household net worth has climbed to an all-time high, fueled by rising house prices and strong stock market gains. In fact, the S&P 500 is up ~40% YoY (99th percentile vs. history), and volatility, overall remains tame. Markets thrive on certainty.
- Fiscal Tailwinds Will Remain Intact—Congress passed ~$1.7 trillion in stimulus packages over the last four years through the CHIPS, Inflation Reduction, and the Infrastructure and Jobs Acts. Our political analyst estimates that ~75% of that authorized spending has not yet been spent. While there may be concern that former President Trump could redistribute this money to other areas (and potentially lead to delayed disbursements), a Harris win would ensure that fiscal spending continues and remains supportive of economic growth.
- Additional Government Stimulus—VP Harris has also floated additional policies that could be supportive of economic growth. Policies that she has announced include $25k first-time home buyer assistance (which could boost the housing market), an expansion of the child tax credit, and a $50k small business tax break. All could help boost investment and consumer spending.
- Extension Of Tax Cuts—A Trump victory will likely see an extension of the 2017 Tax Cuts and Jobs Act (TCJA) when it expires at the end of 2025. This would be good news as it alleviates the potential of American households facing a significant average tax hike (~$1,900 according to the Brookings Institute) if Congress does not act in 2025.
- Less Regulation—Regulations would likely be further rolled back under a second Trump presidency. Trump tends to be viewed as more ‘business friendly’ and in favor of reducing burdensome regulations, especially in the healthcare and financial sectors. Less regulation could promote more investment and growth, including for small businesses.
- Lower Energy Costs—With Trump’s ‘Drill, Baby, Drill’ energy policy, increased oil production could lower oil prices, driving business and consumer costs down and helping to further depress inflationary pressures.
- Manufacturing Boom—While tariffs could potentially be seen as inflationary (although not under Trump’s previous term), they could also incentivize the re-locating of manufacturing capabilities back to the US—creating jobs, improving our supply challenges, and further supporting the re-industrialization of key strategically sensitive goods (like semiconductors and health care products).
For more thoughts surrounding the election results, please join us for our webinar on Thursday, November 7 @ 4 PM ET. Register here!
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