Executive summary:
- We believe the state of the U.S. economy will play a large role in determining which political party does well in November’s elections.
- Markets generally prefer gridlocked results—where neither political party wins a clear majority—as an election outcome. After all, a gridlocked legislative body means politicians can't make decisions—which means they can't make bad decisions.
- While the upcoming elections may create volatility, the fundamentals of investing won't change.
Do presidents and prime ministers make economies? Or do economies make presidents and prime ministers? 2024 is a year of significant elections, with more voters heading to the polls worldwide than ever before. At least 64 countries will hold major elections. So, what does that mean for institutional investors?
Mark Eibel, director of client investment strategies at Russell Investments, recently led a panel discussion to separate the noise from the meaningful news and uncover how election results may impact portfolios. On the panel were Andrew Pease, chief investment strategist at Russell Investments and Kaspar Hense, senior portfolio manager of investment grade credit at RBC BlueBay Asset Management.
During the discussion, they explored:
- Monetary policies and regulations: Which parties are likelier to try to juice the economy with fiscal stimulus? Which might be more conservative? And how much impact can the winners actually have?
- Regulatory changes: Legislative changes typically come from Congress. But what about regulations? Which party is more likely to loosen the reins? And would looser regulations be a good thing for long-term investors?
- The pace of the energy transition: How might the different parties around the world impact climate-and-energy-driven sectors? What might that mean for inflation?
- Navigating the rest of 2024: Although the elections may be many months off, what kind of near-term volatility may occur between now and then?
Following are highlights of their 50-minute conversation. Periodic timestamps are provided.
To start the conversation, Eibel asked Pease to provide context on the upcoming U.S. election this fall.
Do elections really impact portfolios? We certainly focus on them during election seasons. There's an awful lot of attention given to them, but what is the ultimate impact on portfolios, if any, in your viewpoint? <10:27>
“We’ve got so many elections happening around the world, but we've also got a pretty important election happening in the United States in November, which does present some fairly stark choices,” said Pease, based in London. From a top-down point of view, he added, given the elevated geopolitical risk environment, investors need to keep a closer eye than normal on how the election may affect policy regarding the Russia-Ukraine War and issues in the Middle East.
Hense provided the European perspective and mentioned elections in Taiwan, Poland, Mexico and South Africa, along with potential implications on portfolios based on those regions.
“As for the U.S., if we're in an environment of low unemployment, inflation coming down, and the Fed starting to cut interest rates, I think that favors the Democrats. Ultimately, I think it's the economy that will determine who wins,” Pease added.
What observations do you have on how markets tend to perform depending on which side of the aisle wins, or whether it's a clear majority or a split party? How do you see that playing out? Any different from history?
“We know markets go up more than they go down, so you want to stay invested most of the time, which is the obvious answer,” Pease said. “The worst outcome is when one party has a clean sweep. Gridlock is your friend—if politicians can't make decisions, they can't make bad decisions, and that's typically being the best outcome for market. I think if we do get gridlock, I think that will be not the worst outcome for equity markets in particular.”
You mentioned that the fiscal constraints are starting to bite. Just how much fiscal policy loosening do you project in the U.S. and elsewhere? <39:30>
“If Donald Trump is elected, we can expect less immigration into the U.S. One of the things that's been very positive for the U.S. economy, at least from a macroeconomic stance, is the fact that population growth has pushed up sustainable economic growth, which does actually help in the debt sustainability calculations,” Pease said.
Any predictions on potential supply chain issues?
We are living in more precarious world now in terms of supply chains, especially due to COVID-19, Pease said, calling today’s approach a “just in case” approach versus the previous “just in time” approach.
Regardless of who wins the U.S. election, Pease said supply chains are going to be an issue. “I think we are in this world of elevated geopolitical risk, which will have implications for how companies choose to organize themselves internationally,” he added.
What are your closing thoughts on the upcoming elections and their impact on institutional investors? <48:57>
“There’s potential for a lot of volatility to be created,” Pease said. “Certainly, the geopolitical environment is pretty hot today, but remember, it’s been hot for a few years now,” he said, referring to the Russia-Ukraine War, the Oct. 7, 2023, Hamas attack on Israel and other events occurring around the world. Oil prices, however, continue to hover around $80 a barrel, Pease noted, showing that these events haven’t really materially impacted portfolios yet.
“The lesson here is that it’s important to go back to the basics of portfolio construction. It’s all about the valuation, the income you expect to get from your asset classes, and how you put it all together,” Pease said.
Ultimately, investors shouldn’t get blindsided by what's happening with elections, Pease advised. “I’d suggest looking at the situation opportunistically. It will create volatility, but the fundamentals of investing won't particularly change,” he concluded.