30 Jul 2024 | 5 minutes to read
The US electoral race continues to gain investor attention. After weeks of speculation, President Biden withdrew himself as the Democratic candidate for the Presidential election, endorsing his Vice President Kamala Harris to be the nominee. While Harris will not officially be appointed as the candidate until the Democratic National Convention, beginning on 19 August, the Party has confirmed that she has support from enough delegates that she will be the nominee.
Harris’ appointment offers three benefits to the Democrats. As the vice president on the incumbent ticket, Harris can access Biden’s campaign funds. She may also benefit from the incumbency advantage that would have been conferred on Biden. Her early selection also limits uncertainty and the chance of disagreement at the convention.
The real question is what this means for the Presidential race. Since Biden’s withdrawal, the Democrats have recovered in the polls, after a dip, which saw support swing behind Republicans. Betting odds also show the Democrats recovering ground lost by Republicans, with both parties now very close.
Undoubtedly, Harris’s appointment makes the presidential race closer to call and markets have also moved to reflect this change. Some stocks benefitting from the “Trump trade” have lost momentum, including for-profit prison companies and immigration enforcement firms.
The second consideration for markets is who will control Congress and the Senate. While the Democrats are expected to maintain control of Congress, it will be difficult for them to hold the Senate. Without control of Congress and the Senate, a president is limited in his or her powers, especially with regards to controlling fiscal policy. This means that a divided government would likely lead to watered-down tax and spending policies, and any package will need bipartisan support. However, the president would have greater freedom to pass laws without the support of Congress or the Senate on areas such as trade policy.
Under a Trump victory, we expect to see an escalation of trade tensions with China, Mexico and Europe, as well as an attempt to extend the Tax Cuts and Jobs Act, with partial measures to fund the lower receipts this would entail. A Harris win could mean some of the measures proposed in Joe Biden’s original Build Back Better plan are followed through with, accompanying revenue measures.
US economic growth data was “just right” last week, with stronger GDP data accompanied by a cooler inflation print.
GDP growth in the second quarter accelerated to 2.8% from 1.4% quarter on quarter annualised, ahead of consensus. The main driver of growth was healthy consumer spending, increasing at an annualised rate of 2.3% in the second quarter, up from 1.5% in the first quarter. This reflected stronger demand for both the services and goods sub-sectors. A rebound in goods demand stemmed from increases in auto parts, vehicles and household equipment, possibly a result of less aggressive price increases in these categories. The services sector grew due to increases in housing, utilities and recreational services spending.
On the inflation side, Friday's Personal Consumption Expenditures Price Index (PCE) showed inflation rising month-on-month by 0.1% in June, from 0.0% in May, with core inflation at 0.2%. However, annually, PCE edged lower to 2.5% from 2.6% in May, while core PCE slowed to 2.9% quarter-on-quarter from 3.7%.
While stronger economic activity may give the Federal Reserve (Fed) cause to hold off on rate cuts, indices point to slowing activity, especially in the services sector. In contrast, well-behaved inflation data is expected to give the Fed confidence that inflation is sufficiently under control to allow cuts. Futures are now pricing in a September interest rate cut, with another penciled in for later in the year.
With US earnings season well underway, rotation within the equity market has been noticeable. In aggregate, earnings have been broadly a little ahead of expectations. However, there were some notable misses, including in the technology and “magnificent 7” names. Tesla for example, missed earnings expectations again, while Alphabet, formally known as Google, beat earnings expectations; however the results are still raising some questions for analysts. This followed a number of announcements that provided headwinds for the tech sector, including the prospect of greater regulation, uncertainty surrounding Taiwan, and the Crowdstrike system failure. As a result, investors continued to rotate out of tech and large cap names into smaller names and less favored sectors. Both financials and energy sectors picked up in the US, supported by stronger US GDP data. How durable this change in leadership will be remains to be seen. It is growth sectors that tend to perform better in the late stages of the cycle, and after rate cuts.
Important information
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.