KPFA MMM June 2024

Monthly Market Monitor

June 2024

US President Joe Biden in May threw more coal on the fire in the ongoing trade war with China.

Trade war enters next round

In a Nutshell

Our view on the markets

US President Joe Biden in May threw more coal on the fire in the ongoing trade war with China. The raised import tariffs on Chinese goods including electric cars, semiconductors, lithium-ion batteries, and photovoltaic cells are aimed at putting a stop to China’s suspected dumping-oriented foreign trade policy, at least in the USA. A lot of election campaign rhetoric is in play here, however. The imposition of a 100% tariff particularly on electric cars from China is purely symbolism because they already barely circulate on American roads as is today.

AI fever

After undergoing an overdue correction in April, equity markets resumed their upward trend in May, with many indices climbing back to new year-to-date and all-time highs. Statistics fans likely took note of the fact that the US market rose more than 10% over this year’s first 100 trading sessions – in the past when that happened, further share-price gains over the rest of the year averaged out to almost 9% (in the 85% of the times that the market continued to climb over the remainder of the year). The recent rally was once again driven by those stocks that benefit the most from the artificial intelligence theme. Microchip giant Nvidia capped this trend at the close of the first-quarter reporting season.

500 index during US presidents’ terms in office since 1945

Biden vs. Trump redux

Roughly a half-year ahead of the US presidential election, there are hardly any doubts anymore: Joe Biden will face his predecessor Donald Trump if health problems for the former or incarceration of the latter don’t prevent this rematch from taking place. Five months are an eternity in (US) election years. A lot can (and will) happen between now and November 5. Nevertheless, we venture a look ahead at what’s arguably the most important event on the geopolitical calendar in 2024 and examine its potential implications for financial markets.

Investing one’s assets should be an apolitical matter. Hence, a look at the stock market’s performance under the various US presidents over the last 80 years is intended solely for use in the next bout of elevator small talk. In the past, the market’s performance was quite a bit better statistically under a “blue” regime. Whereas the S&P 500 index ended each Democratic president’s term in office at a higher level than where it started, investors under the Republican presidents Richard Nixon and George W. Bush had to put up with double-digit percent share-price declines. But whoever scrutinizes the data quickly discovers that this “red” performance owed more to major crises (oil crisis, dot-com bubble, great financial crisis) than to the presidents’ party membership. Be it Biden or Trump, neither of them can decisively affect the timing of the next recession and the trajectory of the markets. The statistics show that double-digit percent drawdowns will occur either way, regardless of whether under a “red” or “blue” presidency.

HarryS.Truman(1945-1949)HarryS.Truman(1949-1953)DwightEisenhower(1953-19…DwightEisenhower(1957-19…JohnF.Kennedy(1961-1963)LyndonB.Johnson(1963-196…LyndonB.Johnson(1965-196…RichardN.Nixon(1969-1973)RichardM.Nixon(1973-1974)GeraldR.Ford(1974-1977)JimmyCarter(1977-1981)RonaldReagan(1981-1985)RonaldReagan(1985-1989)GeorgeBush1989-1993)BillClinton(1993-1997)BillClinton(1997-2001)GeorgeW.Bush(2001-2005)GeorgeW.Bush(2005-2009)BarackObama(2009-2013)BarackObama(2013-2017)DonaldTrump(2017-2021)JoeBiden(2021-2024)

Source: JPMorgan

There are mounting signs that economic activity in Europe has bottomed out by now.

Macro Radar

Taking the pulse of economic activity

Trade war enters next round

A half-year ahead of Election Day on November 5, US President Joe Biden has thrown more coal on the fire again in the trade war with China. The raised import tariffs on goods including electric cars, semiconductors, lithium-ion batteries, and photovoltaic cells are aimed at putting a stop to China’s suspected dumping-oriented foreign trade policy, at least in the USA. A lot of election campaign rhetoric is in play here, however. The USD 18 billion worth of goods affected in total account for only 4% of Chinese exports to the USA and just 0.5% of all Chinese exports worldwide. The imposition of a 100% tariff particularly on electric cars from China is purely symbolism because they already barely circulate on American roads today.

The Fed can take its time

At the start of this year, financial markets were pricing in six to seven quarter-point US interest-rate cuts for 2024, largely in light of dovish comments from US Federal Reserve officials. The Fed has since had to backpedal in the wake of multiple higher-than-expected inflation prints. The operative word now is “patience” because market participants by now are anticipating just one to two quarter-point rate cuts by year-end. The Fed actually does seem able to take its time in view of continued robust US economic activity on the whole. Although there recently have also been some negative macro surprises, they were attributable mainly to disappointments caused by soft data points (sentiment surveys). According to the Atlanta Fed’s GDPNow tra-

cker, the US economy is on pace to grow at an annualized rate north of +3% for the second quarter. A soft landing still seems possible, especially since inflation in the months ahead looks set to continue on the downward trend that resumed in April.

Light at end of tunnel in Europe

There are mounting signs that economic activity in Europe has bottomed out by now. Purchasing managers’ indices came in much better than expected in May, mainly because manufacturing sentiment has now also brightened lately. The EU economy expanded at an annualized rate of +1.2% in the first quarter. The growth gap versus the USA looks set to close rapidly in the quarters ahead. The upturn is likely to be facilitated by cuts to interest rates. Although a vigorous rate-cutting cycle is not in the cards, an initial lowering of interest rates by the European Central Bank in June seems by now to be practically a done deal because the protracted period of persistent wage increases looks set to subside soon, according to leading indicator data.

China’s next (mini) bazooka blast

The efforts undertaken to date by the government of China to stabilize the country’s ailing real estate market have not been crowned with success thus far. Quite the contrary, in fact, urban real estate prices registered their biggest decline in nine years in April as the number of sale transactions also continued to plummet year-on-year (–45%). In light of these developments, further support measures were announced in May. In addition to the lifting of most restrictions on real estate purchases, the nationwide minimum mortgage rate was repealed and the minimum down-payment ratio for first-time home buyers was lowered from 20% to 15%. The centerpiece of the stimulus measures is a program under which municipal governments reportedly will buy up unsold homes and convert them into affordable social housing projects. The People’s Bank of China will initially provide CNY 300 billion in loans to fund the program. That amount, however, seems to be merely a drop in the bucket given China’s estimated CNY 30 trillion real estate overhang.

However, a closer look at the Q1 figures reported by US corporations mutes the euphoria somewhat.

Asset Allocation

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Equities: AI fever

• After undergoing an overdue correction in April, equity markets resumed their upward trend in May, with many indices climbing back to new year-to-date and all-time highs. Statistics fans likely took note of the fact that the US market rose more than 10% over this year’s first 100 trading sessions – in the past when that happened, further share-price gains over the rest of the year averaged out to almost 9% (in the 85% of the times that the market continued to climb over the remainder of the year). The recent rally was once again driven by those stocks that benefit the most from the artificial intelligence theme. Microchip giant Nvidia capped this trend at the close of the first-quarter reporting season: the company surprised market participants with better-than-expected quarterly numbers, issued an upbeat guidance outlook, and for the first time saw its stock price climb above USD 1,000 per share –the stock split that Nvidia announced along with its earnings report was as consequent as it was emblematic of the current AI fever.

• However, a closer look at the Q1 figures reported by US corporations mutes the euphoria somewhat. Although they beat analysts’ previously lowered estimates by a wide margin, as so often happens, the earnings growth among US blue chips was due exclusively to the Magnificent Seven for the fifth consecutive quarter. The other 493 companies in

Monetary/fiscal policy

Corporate

Valuation Trend

Investor sentiment

the S&P 500 index registered year-on-year profit declines. This divergence has helped growth stocks to continue to outperform value stocks in recent weeks. Their outperformance, though, is very overstretched by now, making a temporary contrary movement quite probable. Investors who have partaken in the AI boom to date should think about taking further profits.

• Rotations are also becoming apparent in other segments of the equity market. The performance of defensive sectors has caught up to that of cyclical sectors in the second quarter after a protracted period of relative weakness. The traditionally defensive Swiss stock market has benefited from this and has risen more than average in recent weeks. The sentiment swing in favor of defensive stocks has been backed by hard data – defensive stocks in the S&P 500 index outpaced cyclicals in terms of earnings growth in the first quarter for the first time since the outbreak of the COVID-19 pandemic.

• However, investors thus far still have had to wait for a rotation from large caps to small caps. This “bet on size” has been in the red year-to-date across all regions. The outlook for smaller stocks might improve, though, in light of the interest-rate cut by the European Central Bank expected in June. In the past, an easing of monetary policy often fired the starting gun for a comeback at least for European small caps.

Fixed income: In calmer waters

• Volatility on fixed-income markets has continually decreased in recent months. The nervousness index for US Treasury bonds (MOVE index) fell in May to its lowest level in two years. An overheating of the US economy and renewed signs of US inflation have recently become less probable again, but an immediate cooling of economic activity has also become just as unlikely. This state of limbo is reflected in the yield on 10-year US Treasury notes, which is hovering in the middle of the past year’s trading range at a level of around 4.4% at last look. The risk/reward tradeoff on investment-grade sovereign and corporate bonds remains attractive at this yield level. If the underlying macroeconomic conditions deteriorate, this part of one’s portfolio will likely demonstrate its safety-parachute properties.

• The prices of Japanese government bonds (JGBs) have tended to buck the wider trend in recent weeks. The yield on 10-year JGBs climbed above the 1% mark for the first time since 2013. This means that market participants are pricing in a further tightening of Japan’s monetary policy. This assessment is not unjustified because as it has often done lately, the Bank of Japan sprang a surprise in mid-May with its announcement that it will soon buy up fewer bonds on the open market in its regular operations. Prices of Japanese bonds are likely to remain under pressure in the months ahead against this backdrop, but the phaseout of the Japanese monetary-policy experiment will probably be just a sideshow for Western investors in any case.

Alternative assets: Challenging real estate market

• The price of gold ascended to a marginal new high of USD 2,450 per ounce in May, but was outshone by other metals last month. The price of silver cleared the USD 30-per-ounce hurdle for the first time since early 2021 and entrenched itself at an elevated level. The price of copper actually even hit a new all-time high. Whereas the silvery precious metal’s price increase owes mainly to a certain amount of catching up to do versus gold, high demand for copper in connection with the green transition is the price driver of the industrial metal. These price developments have been a boon to rather speculative commodity hedge funds, but also continue to benefit trend-following strategies, which have performed very well year-to-date.

• While “location, location, location” is the motto in the physical real estate market, the motto for investors in real estate assets on the financial market is to be especially selective right now. Since long-term interest rates look set to drift sideways or edge downward in the near future, the prospects for rather liquid investment vehicles such as exchange-traded Swiss real estate funds are at least solid. For semi-liquid options, meanwhile, it comes down to which real estate category right now. Funds that bet on (European) logistics properties could soon present a good entry point in the wake of a valuation correction. US funds, in contrast, are still contending with liquidity problems. Following Blackstone’s lead last year, Starwood Capital recently also moved to limit redemptions of fund units.

Currencies:

Pickup in economic activity strengthens the euro

• EUR/USD: Expectations for an initial interest-rate cut in the USA have been deferred to the third quarter. With regard to the European Central Bank, in contrast, various actors have clearly preordained an initial rate cut already in June. This enlarged interest-rate disadvantage already got priced in by the market in April, however. In May, the market turned its eyes to the future and to the likely narrowing growth differential soon between the USA and Europe in favor of the euro. Since the different drivers are more or less offsetting each other right now, a continued sideways drift is the most probable scenario in the near term.

• GBP/USD: The British pound gained ground in May against the euro and the US dollar, though that occurred less against the backdrop of hopes for a new, better government after UK Prime Minister Rishi Sunak surprisingly called early new elections in late May. The pound’s advance was instead driven more by the surprisingly high services price inflation figure in the April inflation report, which now makes an initial interest-rate cut by the Bank of England not until August seem realistic. A sustained directional trend is also not in sight for the GBP/USD exchange rate.

• EUR/CHF: The Swiss franc weakened further against the euro in May, and parity is gradually coming into eyeshot. If the depreciation trend of the past several months doesn’t end before reaching parity, that psychological and technical resistance barrier is likely to put a stop to it for the moment. There can be no talk of an overvalued Swiss franc at today’s slightly cheaper level. Meanwhile, the Swiss National Bank looks set to hold its policy rate steady for the time being – there is little suggesting that it will facilitate a further drop in the value of the currency by immediately further lowering interest rates.

Volatility on fixed-income markets has continually decreased in recent months.

At the start of this year, the Chinese equity market was still widely considered “uninvestable.” In February, the selloff finally culminated in the firing of China’s Securities Regulatory Commission chairman. In retrospect, that act of desperation marked the nadir of sentiment and almost exactly coincided with the absolute bottom of a three-year bear market. Since then, the stock prices of Chinese enterprises listed in Hong Kong have climbed by around 40% within a span of four months. After the “national team” helped to kick-start the rally, it has since been driven by initiatives to reform China’s capital market, by robust first-quarter growth, and by expedited government measures to bolster economic growth. Arguably the biggest driver, though, was the Chinese equity market’s historically low valuation coupled with massive underexposure on the part of investors. The recent sharp increase in short positions in China ETFs indicates that many investors are still skeptical toward China. Meanwhile, hedge-fund investors like David Tepper and Michael Burry (of “The Big Short” fame) have recently built up big long positions in large Chinese tech stocks. Technical factors like the breaching of the downtrend line and buy signals sent by momentum indicators also make a case that further upside potential exists in China.

Chart in the Spotlight

The bear market is over | But many investors do not trust the China rally (yet) Hang Seng China Enterprises Index

Source: Bloomberg

Theme in Focus

Biden vs. Trump redux

Roughly a half-year ahead of the US presidential election, there are hardly any doubts anymore: Joe Biden will face his predecessor Donald Trump if health problems for the former or incarceration of the latter don’t prevent this rematch from taking place. Five months are an eternity in (US) election years. A lot can (and will) happen between now and November 5. Nevertheless, we venture a look ahead at what’s arguably the most important event on the geopolitical calendar in 2024 and examine its potential implications for financial markets.

MAGA MAEG (Make America Even Greater)…

Americans will have a choice in November that they really don’t want because the majority of them oppose a reprise of the 2020 presidential election. Nevertheless, everything thus far has been building up to exactly this duel. In one corner is Donald Trump, who to this day still refuses to concede his defeat four years ago and is out for revenge. In the opposite corner is Joe Biden, who gets to face his preferred opponent and considers himself the only one who can beat Trump.

In the wake of the storming of the Capitol in January 2021, it seemed hardly conceivable that a Trump 2.0 presidency could be possible at all today, but Trump has astounded all of his critics once again with his comeback. His numerous court cases have thus far not harmed him politically and actually have been more of a help to him than not. With a favorability rating above 50%, Trump still enjoys overwhelming and steady support among Republicans. Two impeachments during his term in office, his denial of his election defeat in 2020, and his nationalist rhetoric haven’t changed that at all. Trump evidently is still the best horse in the Grand Old Party’s stable.

“Americans will have a choice in November that they really don’t want.”

Our subjective analysis of a plethora of pundit commentaries indeed suggests that Trump has at least a 50:50 chance of winning the election. Polls are similarly even right now and give Trump a slight edge: he currently is performing better in surveys than he did during the 2016 and 2020 campaigns and was ahead at last look at both the national level and in the USA’s six to seven swing states. The former president is also ahead in the betting market.

In the election campaign weeks to come, Trump looks set to spend a lot of his time in court, but his lawyers’ legal defense strategy (i.e. first seek to stall the trials and then invoke immunity after the election) could prove successful. In any case, there seems to be very little likelihood that Trump will be sentenced to prison before the election. If he makes it back to the Oval Office, the motto then is bound to be “make America even greater.” The erratic behavior so typical of Trump would probably be daily fare also in his second term in office. However, this time his team would prepare the takeover of power much better than before. Trump will probably want to cross off the first items on his agenda on day one of his return to the White House.

A tight race | Election forecasts and the betting market see red Election victory probability priced in on the betting market

It seemed hardly conceivable that a Trump 2.0 presidency could be possible at all today.

poll: Biden vs. Trump

Source: Realclearpolitics

…or WCFTJ (We Can Finish The Job)?

Roughly a half-year ahead of Election Day, President Biden’s chances of winning a second term in office seem moderate at best at first glance. The 81-year-old is by far the oldest presidential candidate in US history to ever run for reelection – question marks about his physical and mental fitness are hard to brush off and could raise doubts among Democratic voters. Outsideparty and independent candidates could make life difficult for Biden and wrest pivotal votes away from him. Last but not least, the sitting president’s dismal poll numbers are also problematic – with a public approval rating of just 40%, Biden is less popular than any of his predecessors (since World War ll) were at this point in the election cycle. Many citizens are blaming the Democrats for the high cost of living, the rise in interest rates, and rampant illegal immigration. Meanwhile, the booming US economy and the recent further drop in the likelihood of a recession haven’t helped Biden thus far. One could think that the election saying “It’s the economy, stupid!” doesn’t apply any longer in 2024.

Little approval | Biden is not benefiting from robust economic activity

Public approval of US presidents’ policies

Source: Realclearpolitics

That is belied, though, by – among other things – the results of a January survey conducted by Pew Research, in which three-quarters of the respondents said that strengthening the economy was the top priority. The real problem for Biden is the USA’s high inflation, which has raised the general price level for goods and services by more than 15% thus far during his time in office, a bigger increase than any of his predecessors over the last 40 years presided over. Against this backdrop, it’s hardly surprising that Democrats at the moment are constantly pointing to the clear, though recently somewhat bumpy, disinflation trend of the last 18 months because they, too, are aware of the literature’s consensus that voters have short memories. According to that theory, what matters most is how good voters feel about their personal financial situation on Election Day (not six or twelve months beforehand). Since inflation looks set to tend to edge downward and real wages are likely to continue climbing up until the election, Biden

can still get his hopes up that the state of the economy will argue in his favor after all in the end. However, what mustn’t arise in the months ahead is a recession. In the event of a sudden slump in economic activity, Trump would walk away with a victory in all probability because a recession in an election year historically has always seen the incumbent president get voted out of office.

Biden’s well-filled re-election campaign coffers could also be helpful to him in the home stretch. In the first quarter alone, he raised USD 165 million worth of campaign donations, much more than Trump raked in during the same period (USD 90 million). Moreover, Trump’s campaign funds are being spent on lawyers’ bills. Biden therefore has a much bigger budget that he can use, for example, to run expensive ads in swing states. Furthermore, the party of the incumbent president has often done better than predicted in past elections. So, true to Biden’s re-election slogan, in the end it may well turn out that the Democrats can “finish the job.” This, however, is predicated on them not just winning over centrists, but also being able to mobilize their core clientele (which includes Afro-Americans, labor union members, and young voters).

What would a Trump 2.0 presidency mean? How would policies in the USA change under Trump? This depends in large part on whether the Republicans also gain the upper hand in both chambers of the US Congress. But even if they succeed in doing so, Trump will not be able to achieve everything on his agenda. He might already exhaust a lot of political capital in his first few months in office. Trump then is bound to face growing opposition from the federal bureaucracy, public opinion, the media, the Supreme Court, moderate Republicans, and the financial markets. Shortly afterwards, midterm elections will be on the docket again.

The details of the Republican agenda may shift depending on the global context and Trump’s whims, but the following changes to the status quo are relatively likely in the areas listed below:

• Higher import tariffs: Trump has raised the prospect of a general 10% tariff on imports. He is even threatening to impose tariffs of up to 60% on imports from China and to revoke that country’s mostfavored-nation status. If American protectionism gets shifted another gear higher in this manner, retaliatory actions by US trading partners would be very probable and global trade would suffer another shock. Tit-for-tat bickering would have an inflationary impact in any event.

• Limits on immigration: The USA’s porous southern border is a vital issue for many voters, and Trump is likely to address it swiftly. He might declare a national emergency, is likely to reinforce border security,

Biden’s well-filled re-election campaign coffers could also be helpful to him in the home stretch.

and will probably spearhead actions to reduce both illegal and legal immigration. In the longer term, less immigration would significantly lower workforce growth, which would also tend to have an inflationary impact.

• Tax cuts: Trump would like to make the tax cuts that he enacted in 2017 (and which expire in 2025) permanent and is eyeing further tax reductions. This would give economic activity another boost in the short term, but would cause the already deep-red federal budget deficit to grow even larger in the longer run.

• Interference in monetary policy: Trump has criticized the interest-rate hikes by the US Federal Reserve, has spoken out against Fed Chairman Jerome Powell, and intends not to extend his term in office in 2026. Although a US president cannot fire a Fed chair “at will” and can only do so “for cause,” in a dispute over appointment powers, courts might cave to Trump in the end. Although moderate Republican senators would probably reject an unorthodox Fed chairperson, they might indeed confirm a monetary policy dove. The central bank’s independence would at least be tarnished.

Trump should be taken seriously, but not necessarily at his word – a lot is simply Trumpian “deal-making tactics“

And what would it not mean?

What won’t happen under a reelected Trump administration is just as interesting a question as what will transpire because a lot of what is feared by many people, is being overblown by many a media outlet, or perhaps is even hoped for by some is at least very unlikely to occur:

• The United States will not become a dictatorship: Trump will hold a lot of power at least at the start of his term in office, which could erode the customary checks and balances. However, midterm elections, in which the governing party has almost always lost influence in Congress in the past, will be just around the corner in 2026. Trump redux would then be over on January 20, 2029, at the latest. The three-fourths of the states needed to amend the US Constitution to extend presidential term limits would never ratify that. A lot of things can happen in four years, but an autocratically governed USA under the ironclad rule of Trump isn’t one of them.

• No withdrawal from NATO: Trump obviously is not a fan of NATO. During his term in office, he repeatedly threatened to leave the alliance. Under a Trump 2.0 administration, the tone and methods might become even more antagonistic, but Trump’s aim would remain the same as before: he wants the Europeans to increase their defense spending to 2% of GDP as quickly as possible. Trump should be taken seriously, but not necessarily at his word – a lot is

simply Trumpian “deal-making tactics.” In any case, a US exit from NATO would only be possible with the consent of the Senate (which it is very unlikely to grant). Besides, even Trump knows that the US public continues to highly esteem and endorse the defense alliance.

• The federal budget deficit won’t shrink: Projections by the Congressional Budget Office are pointing distinctly upward for both the federal budget deficit and the federal debt load, but neither the Republicans nor the Democrats are likely to put forth genuine spending reforms. If a Trump administration does lower spending, the reductions are likely to be immediately offset by tax cuts. There is a scant prospect of a noteworthy consolidation of the federal budget – it’s more probable that the deficit will explode.

• Subsidies won’t be canceled: Trump and Biden both advocate for reviving US industrial policy. There is bipartisan unity on this issue, which makes corresponding legislation possible. Although Trump might cut “green” subsidies, the trend toward greater government support for US industrial production and the building of necessary infrastructure is likely to remain in place.

• Bureaucracy won’t be trimmed: Trump claims that he will “drain the swamp” and restructure the federal bureaucracy, downsizing the apparatus of government and breaking entrenched bureaucratic resistance to Republican policies. However, bureaucracy is more tenacious than one desires at times, and courts will intervene to prevent a comprehensive “purge.” Trump’s original intention will probably end up amounting at most to a minor administrative reform.

Interim conclusion: Even in the event of a Trump 2.0 presidency, the USA will continue to lead the world democratically and geopolitically. However, a second Trump administration would be accompanied by further rising deficits, a widening wealth gap, an increased labor shortage, higher import prices, and a looming hollowing out of the apparatus of government. All of the above would tend to have an inflationary impact in the long run. Meanwhile, a lot of continuity can be expected with regard to foreign-policy adversaries such as Russia and China and geopolitical hot spots like the Middle East. In this sense, Trump, too, is unlikely to abandon Ukraine despite his threats to the contrary. However, Trump will probably stick to his transactional and aggressive rhetorical ways, so permanent headline risk would be assured.

What won’t happen under a reelected Trump administration is just as interesting a question as what will transpire.

After the election, there will then be a blue (Biden) scenario and a red one (Trump).

Or BBB (Build Back Better) after all?

So much for Donald J. Trump. But what would happen if Joe Biden gets reelected? It would mainly mean more of the same. Government spending, for example, would likely remain high. Unlike Trump, though, Biden plans to raise taxes on corporations and the rich, which should at least mute the expected increase in public debt. However, as recent years have shown, Biden is not the anti-Trump. Higher import tariffs are not taboo to him either – on the campaign trail in April, he called for a tripling of tariffs on steel and aluminum from China. But the Democrats will probably continue to focus more of their efforts in the future on creating additional incentives to reshore and build out manufacturing capacity in the USA. Empowering workers (mainly through labor unions), boosting social spending (mainly for early childhood education), and tightening antitrust policies are other components of Biden’s Build Back Better Plan, which has only partially been put into effect thus far. However, the only way this ambitious agenda can be implemented is if the Democrats win a majority in both chambers of Congress, which at least seems quite unlikely to happen as things currently stand. If the Democrats don’t gain control of Congress, Biden will probably concentrate on defending his achievements thus far under Bidenomics, particularly the massive public investments in infrastructure (Infrastructure and Jobs Act), semiconductors (CHIPS and Science Act), and green technologies (Inflation Reduction Act). In the case of geopolitical challenges, Biden – in contrast to Trump – will probably continue to seek consensus with US allies and is likely to strike a comparatively softer tone.

"Investment strategy and portfolio construction should be an apolitical matter."

If Trump becomes the frontrunner… | …the equity market could come under pressure

Panic over Trump: Sooner, later, or not at all?

Media reporting on the upcoming election looks destined to grow louder and louder in the weeks ahead. In the face of an ever more heatedly pitched duel between two old men, it becomes all the more important for investors to keep their cool and to look away once in a while. The remaining months until the election are bound to be unusually distracting. We would like to remind readers here that investment strategy and portfolio construction should be an apolitical matter.

Nevertheless, it’s justified to wonder how markets might behave before and after the election and whether there is a Trump risk. With regard to the equity market, statistics on the four-year presidential cycle provide at least a reference point. To wit, the equity market normally rises in an election year to the same extent on average as it does in any other year. However, the devil is in the details. In election years in which the incumbent president was not reelected, the equity market was more volatile than average in the spring and summer. Given the neck-and-neck race at the moment, mounting uncertainty about an upcoming change of leadership in the White House could cause 2024 to become similarly volatile.

After the election, there will then be a blue (Biden) scenario and a red one (Trump). In the event of a Biden victory, theoretically there would be no cause for major market reactions because the man is known and would stay the current foreign-policy and fiscal course. If, instead, the red scenario (a Trump victory) comes to pass, the bond market might proverbially “see red” and could suffer a temporary selloff particularly if the Republicans manage to paint Congress completely red, the prospect of further tax cuts without spending or revenue offsets looms, and the federal budget deficit threatens to definitively spiral out of control. If the panic on markets is then febrile enough, that would possibly discipline even a man like Trump and could cause him to come to his senses with regard to budget policy.

Trump in the White House and a renewed deadlock in Congress would possibly be the variant most welcomed by financial markets. Panics over Trump, even if perhaps only lasting for a few hours, could nevertheless ensue during a second term in office thanks to his legendary hyperactive social media messaging. In that case, investors should draw a lesson from the 2016–2020 period. A volatile news flow and intermittent volatility on the markets at that time ultimately did not bring about any noteworthy macroeconomic changes. Many an investor may find it hard again in the future to stay objective and calm in the middle of an X storm (a.k.a. Twitter storm) by Trump, but it would be advisable to do so. Investors should batten down the hatches and wait until the storm is over. Every single time.

The Back Page Asset Classes

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