US Election
We have turned cautious on equities for the first time since August 2022. Our end-of-the-year target for 2024, 5,500 on the S&P 500, has been reached. From here on out, any upside is gravy. However, we worry about US – not European – politics. In fact, we think investors could profit from the recent selloff in France. The real risks are in the US.
In our Volume I – The Alpha Report – we posit that the French bond market reaction is a mere amuse bouche for what is coming to the US. All year, we have warned investors that US politics could induce a bond market riot. This moment is nigh. Act accordingly!
The bond market should sell off and drag stocks down on higher odds of a single-party sweep, policy uncertainty, unorthodox Trump presidency, aggressive tariffs, large tax cuts, large budget deficits, labor shortages, a fired Fed chair, and higher inflation.
US assets and the US dollar should remain resilient relative to global peers over the next 12 months as policy uncertainty, election risk, and geopolitical risk reach a climax. After that, investors should reassess their regional allocation.
Republicans are favored in the House and Senate even if they do not win the White House. A Democratic sweep is a 20% risk. The policy implication would be inflationary, but not so much as under a Republican sweep. Election uncertainty should increasingly weigh on cyclical and high-beta assets in the second half of 2024.
Democrats remain slightly favored for the White House because they are the four-year incumbent presidential party and the economy is not in recession. But if the unemployment rate rises in the lead up to November, then Biden and Democrats will become disfavored regardless of Trump’s convictions.
Favor defensive sectors, low-beta assets, and long-duration bonds until the election uncertainty is lifted one way or another over the next five months.
The stock market will suffer a setback from the weakening labor market and a rebound in US and global policy uncertainty.
Investors should prepare for economic data to weaken even as policy uncertainty and geopolitical risk skyrocket ahead of the US election.
Democrats are favored to win the election until recession materializes. But recession risks are high. Investors should adopt a defensive and conservative strategy in 2024 amid extreme US policy uncertainty.