MacroVisor: US Election Special

We’re finally just days away from the US Election - Tuesday, November 5, 2024. The results could take up to 3-4 days to come in. Today, we take a look at some final thoughts and charts ahead of the US elections.

Before we begin, I just want to point out that this is not a political discussion and we don’t have a bias towards any candidate.

Where We Stand

The US Presidential Election race has evolved quite a bit in the last few weeks since President Joe Biden stepped aside and gave his nomination to VP Kamala Harris. Former President Trump had a vast lead prior to VP Harris stepping in, but since then the tables have turned a little. According to opinion polls, Harris now has the lead, albeit not by much. The Cook Political Report has an excellent aggregation which is shown below.

[The CPR moving average includes 12 more traditional polls that incorporate live interviews (ABC News/Washington Post, CNBC, CNN, FOX News, Grinnell/Selzer, Marquette Law School, NBC News, NPR/PBS/Marist, NYTimes/Siena, Quinnipiac, Suffolk/USA Today and Wall Street Journal) and nine online/large panel polls (ABC News/Ipsos, CBS News, Economist/YouGov, Harvard/Harris, Morning Consult, Pew Research Center, Reuters/Ipsos, SurveyUSA and Yahoo News).]

The Betting Markets had Trump in a significant lead over Harris, although in the past 24 hours that lead has seemed to narrow. Not sure if it was the Saturday Night Live skit that Harris did! ??

“PredictIt has placed a 51% chance of a Harris victory on Tuesday, marking the vice president’s first lead over Trump—who trails Harris at 49% odds—on the site since Oct. 9” - Forbes

The bottom line though, is that a Harris victory will actually be a surprise for the markets. This is not the same situation as 2016, when Trump was the surprise candidate and the winner.

But, the question now turns to the Senate and the House. More and more, analysts have started to anticipate a Red sweep, i.e., Trump as President, and the Republicans winning the majority for the Senate and the House. Most are of the opinion that if Trump wins the presidency, a Red sweep will prevail. On the contrary, a Harris win may not guarantee a Blue sweep.

Here are some election scenarios presented by Barclays based on research from the Cook Political Report.

The equity and bond markets have also been pricing in a Trump win over the last couple of weeks.

According to CPR: “The race for control of the U.S. House remains as close as it’s ever been. At the moment, Republicans hold 221 seats to Democrats’ 214. In our final House race ratings, Democrats are favored in 205 seats, while Republicans are favored in 208, leaving 22 seats in the Toss-Up column. If the Toss Ups split down the middle, Republicans would maintain their majority by an even narrower 219 to 216 seat margin.”

So the point is, the Republicans have a higher chance of winning the House majority because they need fewer seats.

CPR further points out that the Senate race is ending on a favorable map for Republicans, likely leading to a GOP majority. If they win key “Blue Wall” states, they could secure up to 54-55 seats, providing a buffer for 2026.

It’s going to be a tight race between Trump and Harris, with markets marginally favoring the odds of Red sweep, or mixed Congress at best.

Policies

I’ve said it quite a few times before - both candidates have inflationary policies. But this is a good time to recap the policies. Found this great chart from Pictet that does a good job summarizing both sides.

Bond Markets

The bond markets are already pricing in that elevated level of uncertainty, and the inflationary policies have been discussed. What’s more is that it’s quite clear that the fiscal impulse is not going away, regardless of who wins. There have been several projections of increases in the US Debt and the numbers are between a staggering $3T to $5T over the next decade.

My prediction to the end of the year has always been a bear steepener, i.e., the yield curve being pulled upwards by longer term rates. Looks like Credit Agricole is also leaning towards the odds of bear steepener, as they lay out in the chart & table below.

The S&P 500

Finally, we come to the markets. As we’ve said above, over the past few weeks, the markets have been pricing in a Trump win. This has led to a rally in Financials, and small caps. It’s been a challenge to see it clearly because of earnings season.

Past performance suggests that the market tends to rally one week prior to the election, and then it takes about a month to see positive gains. Given below is the performance of the S&P 500 and its sectors pre- and post-election.

How the market has moved in the past has likely been dependent on the president-elect, and his policies. This time will be no different.

Trump win possible rally:

• Financials - Higher long-term yields, easier regulations
• Industrials - Reshoring
• Bitcoin
• Big Pharma

Harris win possible rally:

• Healthcare - particularly providers
• Technology
• Consumer Discretionary
• Energy (restrictions on pumping oil may actually drive prices higher)

What we do know for certain is that volatility increases going into an election and subsides soon after, as traders take off their hedges. This time volatility is persisting until 2 weeks after the election to account for the uncertainty. So, it doesn’t give us a very different picture than what we’ve seen in terms of past performance. The markets could remain under pressure for up to 2-3 weeks following the elections.

Closing Thoughts - Volatility will prevail

What we need is for the election to go smoothly so that the markets can resume doing what the market does best. As we exit the two week period after the elections, we will get into holiday season, and a period of strength for the markets. It’s quite likely that the market will rally into the end of the year, with the two major events of the year behind us - the US Election and the first Fed cut.

Speaking of which, we have the Fed Rate Decision as well next week, pushed out to Thursday instead of Wednesday because of the election. While we did see PCE inflation numbers come in marginally hotter, the weak labor market report on Friday has sealed the deal for a 25-bp cut next week. The market is pricing in two more cuts for the year, next week and December.

What we do know for certain is that volatility increases going into an election and subsides soon after, as traders take off their hedges. This time volatility is persisting until 2 weeks after the election to account for the uncertainty. So, it doesn’t give us a very different picture than what we’ve seen in terms of past performance. The markets could remain under pressure for up to 2-3 weeks following the elections.

None of the above is investment advice.