A roadmap of possible US election outcomes and their context versus market fundamentals.

Key points:

  • A benign US election process with a quick and clean result would be the least disruptive outcome for capital market but this appears to be a relatively low probably scenario.
  • Given that parts of the market look abnormally stretched, we think it’s prudent that investors should have a plan should market uncertainty and/or volatility escalate.

History shows that US equities in the very short term tend to trade flat into elections but then rally out the other side as investors have more certainty on forward policy and leadership. US equity markets appear to be in a mood to do the same in 2024, with typical seasonal strength into Christmas likely to become the market narrative should the election go smoothly. However, the current circumstances look less than typical.

History shows that US equities in the very short term tend to trade flat into elections but then rally out the other side as investors have more certainty on forward policy and leadership. US equity markets appear to be in a mood to do the same in 2024, with typical seasonal strength into Christmas likely to become the market narrative should the election go smoothly. However, the current circumstances look less than typical.

First let’s consider what a win might look like on either side. There is a mountain of opinion about what election outcomes might mean for the US. The reality is that no matter who becomes President, investors will face ongoing uncertainties about policies which have potential to mould the US economy. Should Harris prevail, it looks unlikely the Democrats would control the US senate, making the passage of reformative legislation more difficult. The “status quo” might actually be the most benign outcome. Should Trump prevail, there is greater uncertainty about whether pre-election policy rhetoric – particularly on high potential impact policies around trade tariffs – are actually enacted.

At this point it does look like the policies of both parties though would entail more Government spending than capital markets currently expect. This could re-assert upward pressure on US inflation and might mean that the pace of US rate cuts could be slower than markets currently hope.

It’s quite notable that the pricing of US Treasuries have reflected this very potential in recent weeks, with yields trending higher. It’s equally notable that equity market behaviour looks to be in disagreement with bonds, arguably disregarding risks around the US rates trajectory. Other market valuation metrics also look somewhat dislocated.

US 10-Year Treasury Yields

US credit spreads have narrowed to levels not seen since June 2007. This decline mirrors the strength in equities but also reflects expensive valuations and can indicate some complacency in the market's assessment of credit risk. Absolute US equity valuations are at decade highs. Equity valuations relative to bonds as measured by the equity risk premium look the most stretched, with the ERP at multi-decade lows below 1%. Stretched valuations does increase the market’s vulnerability to unforeseen events or uncertainty.

S&P500 - Equity Risk Premium

It's prudent to be prepared

The US is among the biggest success stories in the global economy. To achieve disinflation without much disruption to growth or employment is no mean feat. US corporate earnings have also been strong and resilient, projecting compound growth of 12-15%, which is really important here. However, several measures of capital market strength are looking stretched and/or abnormal with the disagreement reflected in bond yields the most notable. Getting US elections out of the way is typically good for markets. However, several various potential scenarios around the election could easily lift uncertainty and spike market volatility at current levels. Confirmation of the election process itself could include material delay, challenge, dispute and/or unrest. We think investors should prepare accordingly.

Domestic stocks, themes and opportunities that we have recently be advocating for investors include: trimming banks exposure, rotating exposure into resources (BHP & RIO), value in energy (Woodside), US rates leverage via James Hardie and opportunities in stocks on weakness in Lovisa and Eagers Automotive.

International stocks currently on the Morgans US focus list include Meta Platforms, Nike, Coca Cola, Starbucks, Honeywell and Berkshire Hathaway.


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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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