Opinion: Chris Smith examines what the fast-moving developments in the US election race might mean for investors.
The pantomime and uncertainty of US politics have again caught the attention of the entire world, and the investment community is not precluded from this market-moving event.
There’s a nervous energy among those watching who aren’t quite sure what might come next now that President Joe Biden has decided not to run for re-election.
Until this point, Biden’s debate performance had set further in motion the expectation that Donald Trump would win the election in November.
And while the assassination attempt on Trump was another horrific example of the dire state of US politics, it only further accentuated the likelihood of Trump winning.
Biden dropping out has injected some uncertainty into the race and the wait is now on to see who will replace him at the upcoming Democratic convention.
The 81-year-old endorsed Vice President Kamala Harris to take his place. (Source: 1News)
President Biden doesn’t like to mention the stock market often but year to date the S&P500 is up 17% and Nasdaq-100 up an impressive 20%, which isn’t a negative at all for investors.
The latest polls show the Republicans leading the Democrats nationally and in seven of the key swing states, something that will be incredibly difficult for any contender to turn around.
A likely change in government was already being bedded into the risk profile of the stock market, which means we saw many investors hedging bets on the shift to Republican leadership and policies. In the near term, we can expect to see some of those Trump trades easing back while the market waits to see what comes next.
If the polls continue to point to an emphatic Trump victory despite a new Democratic nominee, the US election might be something of a non-event by the time November rolls in.
Mild market impacts
Half the world’s population is heading to the polls in 2024 and the markets have held up incredibly well so far, despite the many political changes.
Elections in the UK, India, France, South Africa, Indonesia and Pakistan contributed just a handful of the enormous political turnout we’ve already seen in 2024.
Despite the heightened attention and drastic increase in newspaper column inches, most of these elections have had mild impacts on market outcomes.
The UK election, for instance, was so well telegraphed that the risk was already factored in well before Britons confirmed the polls by handing power to the Labour Party in a landslide.
The market response was moderate, with the FTSE 250 midcap index up 1.8% in early trading to its highest level since April 2022, while shares in house-building companies were the big winners on the FTSE 100, up 2.3%, as Labour pledged to speed up home building.
The French election was more tightly contested; it was also shrugged off with the nonchalance of a Parisian flicking the ash off the tip of a cigarette. Initially, after the tight election, the French CAC 40 ended the session 0.6% lower, reversing course afterwards, climbing as much as 0.9%.
The Indian election was probably the most interesting of the bunch.
The uncertainty grew as it became clear that Narendra Modi would not have the anticipated landslide victory, but he was eventually returned to power. The market saw an initial drop of 8%, but then rallied 11% over the next few weeks as Modi consolidated his power.
Nervous energy is now turning to the United States, but the risks will similarly be assessed by the time Americans head to the polls.
Historically, a transition from a Democrat to a Republican US President has been seen as positive for the stock market, despite the S&P 500 growing at an average annual rate of 9.8% under Democratic presidents and 6% under Republicans since 1957.
The two big variables in all of this are Trump and his Democratic challenger.
In the last week, Trump’s comments on tougher trading conditions with China in the chip market rattled tech stocks and hit the Nasdaq hard. At the same time, Trump's suggestions of a pro-growth 15% corporate tax (down from 21%) will be viewed favourably by the market decision-makers.
These offer the clearest examples of how Trump’s comments are already impacting the mood of investors.
Earnings, market fundamentals matter more
As the election rhetoric ramps up, Trump’s tough talk on China will be watched closely as investors start to gauge the likely impact his next tenure.
Long memories will recall the 2018 trade negotiations when Trump announced via tweet potential 25% tariffs on all imported goods from China where many major US corporates operate. This created big swings in US indices up to 3% on trading days.
The US market is dominated by global companies so their revenues are in the firing line with any changes as politics ramp up.
Ultimately, earnings and market fundamentals will continue to matter more than political changes as companies adapt. Apple, for instance, is already moving parts of production to India to reduce reliance on China with 14% now produced in India.
On the flip side of his strongman persona, Trump is also a stock market guy.
The last time he was president, he tweeted incessantly about the performance of the market and used it as a badge of honour. Regardless of what you think of his politics, there was some merit to his claims, with the Dow Jones industrial average rising 70% over the course of his presidential term.
You can rest assured that Trump will again be keeping one eye on the markets and using it as a political tool should he come back into power.
This is all to say, that in spite of the chaos that so often coincides with American elections, it isn’t likely to have as big an impact on the market in 2024 as many expect.
We can expect to see a few ups and downs as the campaign heats up and comments fly about, but fundamental economic data and company earnings will have a far bigger impact.
Trump’s political bravado will continue to shake the market from time to time, but ultimately the business fundamentals will always trump Trump in the longer term.
- Chris Smith is the managing director of CMC Markets in New Zealand.
SHARE ME