The next few weeks...

“There’s something out there waiting for us… and it ain’t no man.” (Billy, Predator)?

Grappling with the unknowable future is what investing is all about. Sometimes this future seems to stalk us rather than the reverse. Events lie in wait, the impending US elections or the Autumn Budget in the UK, spring loaded with uncertain yet consequential detail. Below, we take a look at the next couple of weeks and how we are positioned for what appears to be a particularly uncertain path ahead.

US elections

The year of elections has so far proved less bleak than many feared. Elections of all shapes and sizes, from free and fair to performative and everything in between, have mostly proved orderly. From a civilised transfer of power in the UK, to the impressive resilience of India’s massive democracy amidst much reduced civic space, there has been plenty for the optimists.

However, now we come to the main event. A return of President Trump to the Oval Office, with a Republican Congress behind him, is now the most likely scenario according to the polls. There is still time to go of course, and the race remains extremely close. Nonetheless, rising bond yields (particularly at more distant maturities) demonstrate investors trying to wrestle with the investment implications.

The problem we invariably have here is understanding what to take literally, or even seriously. This task is further complicated by the fact that whatever policy does make it from campaign trail to actioned reality, will not do so in a vacuum. Market prices will have a say and, if sufficiently violent, may even influence policy. The faltering passage of the US Troubled Asset Relief Programme in 2008 is often cited as an example of how price moves can influence policy. However, for those looking for a more recent example, look no further than Prime Minister Truss and Chancellor Kwarteng’s Budget U-turn in 2022.

The further point is that we are always in danger of overemphasising the newsworthy at the expense of other influences on our investments. There can be little doubt that the US economy is currently humming. Those mourning an absence of dynamism in the last decade plus have much less cause in the wake of the pandemic and the ensuing surge in business startups . Productivity is picking up for a range of reasons beyond (and without) the continuing advances in generative AI.

There are things that the next President can do to disrupt that incredible momentum. However, we wouldn’t want to exaggerate their likelihood or their impact. Tariffs of the sort bandied around on the campaign trail will almost certainly mean less growth and more inflation (and scope for corruption), but the productivity story is likely much more important for investors, even if it will surely continue to prove even harder to measure the effects in real time.

The most important trick for investors is finding ways to stick with it through the always messy thick and thin of the moment. This too shall pass as they say.

Budget – yet more debt?

The world’s investors are rightly much less interested in the UK’s Autumn Budget. However, there are some aspects that could be of wider significance. An important part of the discussion centres around how to account for the UK’s government debt pile. To what extent should the Bank of England’s pandemic activities be included? Should financial assets be counted alongside liabilities? How these questions are answered in the coming days will go a long way to defining the fiscal wriggle room this administration enjoys (or doesn’t) in the next few years.

Some will wonder whether loosening the restrictions on debt accumulation risks another mini budget fiasco. Can a government remain a credible borrower if an accounting sleight of hand can magic up another ￡50 billion of borrowing headroom? There are potentially some important distinctions between this rumoured move and the wreckage of Prime Minister Truss’ brief stay in No. 10.

First, this extra headroom would not be immediately used. The likelihood is that if it is used, it would be for much needed investment rather than unfunded tax cuts. The point may be that the current debate on government debt underestimates how much the state can borrow at contained interest rates. The key in the past has been credible plans for the use of that capacity. The same may be true again.

And the earnings deluge…

Alongside all of this, we are again submerged in corporate earnings reports. The game of cat and mouse between analysts and CEOs is one where the latter have the advantage of course. Figure 1 illustrates this very clearly - earnings forecasts mostly start off too high, are guided lower over time, and then generally surprise that lower bar positively. To that end, the main information contained in earnings season is not so much the earnings themselves and how they measure up to analyst expectations, but the more qualitative information delivered at the meetings.

The sense remains that the US and global economy are still in unevenly decent fettle. Interest rates coming down without a recession and nascent signs of recovering productivity growth are usually about as helpful a backdrop as you can hope for as an investor. Some of that is priced in US stocks for sure, but not all and there is potentially more abundant investment opportunity outside of the US mega cap stocks. Invest in a diversified batch of capital markets assets, close your eyes and turn off your social media feeds.

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