Asset allocation bulletin - June 2024

Asset Allocation Bulletin

Starting Gun

July 23rd 2024. by PM

This was one of Lenin’s weeks – when a decade’s worth of events all fell upon one unsuspecting row on the calendar. An attempted assassination of a presidential candidate, and then the President himself taking a fall. What are the likely stock market consequences?


Biden Bows Out

President Biden is withdrawing himself from the 2024 US Presidential Election and has endorsed Kamala Harris as the Democratic Nominee, who in recent times has fared little better in the polls than her superior. Whilst there is still an official nomination process at the Democratic National Party, and notably Obama stopped short of endorsing her, the Clintons did do just that and it is likely she will carry the vote. Her ‘would-be’ running mate is an interesting point of speculation at this point.

Historically, ‘Sitting President Running’ Election years are strong performers, and 2024 has been no exception. The seasonal pattern below confirms just that. However, with now a greater degree of uncertainty, it is very possible that we fall into the ‘open field’ pattern as recorded below.


Chart 1: Seasonal Patterns in Election Years

Source: Almanac Trader, ARIA


September and October are often the more troublesome months in stock markets, so we shouldn’t be surprised to witness some volatility during that period, before regaining some poise in November. Moreover, even in calendar years have recorded strong returns initially, it’s not unsual after the half way point to see a correction in the order of 8% to 10%.


Call to Arms

The presumptive Republican’s combative response to the shooting was memorable – a punch in the air, whilst barking ‘keep fighting’ did Donald Trump’s chances no harm, eliciting a spike in his election betting odds to over 70%.

There is precedent for such an attack – President Reagan also survived an assassination attempt in his ultimately successful re-election campaign. Moreover, equities seemed to have begun pricing in the potential for a clean sweep of Congress under the Republicans. In fact, ‘trump favoured’ assets, such as the energy sector, had begun to trade well ever since Joe Biden’s ailing performance in the televised debates.

To distill the stock market’s response into a simple narrative, would be to point to ‘deregulation’. Immediately in the cross hairs would be hundreds of government agencies – the EPA, (Environment Protection Agency), FDA (Food and Drug Administration), Medicare and Medicaid will all have their futures considered in the coming years of any Republican overwhelming majority in congress.

The corporate sector, as it was under the last Trump presidency, would inevitably be a beneficiary. Regulatory red tape would be cut, and that would likely support margins. Monies may be diverted from the Inflation Reduction Act towards other national priorities.

There is also discussion about a wholesale overhaul of the tax code – should that benefit Main Street, just as the COVID stimulus measures did, that could copper bottom an economic soft landing and potential re-acceleration in what is a very mature business cycle.

Moreover, there is the potential for another huge credit injection into the US economy. The most recent economic expansion has been driven by fiscal stimulus, or government spending which is abrupt diversion from QE sponsored bull markets of recent times, where it has been easier credit terms which had led markets higher. The potential for Freddie Mac rules to change, allowing for a second mortgage to be taken by borrowers, without having to cede the effective interest rate of the original mortgage, could spark significant borrowing activity in the housing market. As we stand, few borrowers would do so, having locked in very attractive rates when re-financing their home loans before the recent spate of rate hikes got into its stride.

For many Americans, the potential re-run of a Trump / Biden slanging match had caused a certain degree of disengagement from the electoral process. If the starting gun hadn’t quite sounded before, there’s no mistaking the ballistics vapour trail now. Furthermore, whilst initially uncertainty could well see stock market retraces during the late summer months, the markets generally seem to view a Republican presidency through a very bullish lens. Should Kamala Harris manage to energise a younger base that will also cloud the picture and prevent a Republican clean sweep, even if it doesn’t entirely derail the Trump agenda. Given recent turn of events, the greatest show on Earth may not be in Paris this year.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

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