16 Oct 2024
Willem Sels
Global Chief Investment Officer,
HSBC Global Private Banking and Wealth
Jose Rasco
Chief Investment Officer,
Americas, HSBC Global Private Banking and Wealth
2024 is the year that half of the world’s population will have gone to the polls, and the US elections on 5 November are probably the event with the most significant implications for the global economy and markets.
Polls continue to evolve, and betting agencies’ odds reflect the ups and downs in people’s views of what will happen. But actual election victory chances are determined by who gets most of the Electoral College votes, not who has the largest share of the national votes.
Much will depend on those states where there is no clear majority – the so-called ‘swing states’, where just a small number of votes could determine which candidate gets the electoral votes. Those states are Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin.
We do not think it is possible or wise to invest on the basis of a likely outcome. We point to the 2016 elections, where Democrats won the popular vote, but Donald Trump moved into the white house because of a narrow victory in a few key swing states.
There are also 34 Senate seats and all 435 seats in the House of Representatives up for election. The current prediction illustrates the broad range of potential outcomes and uncertainty.
There are four potential US election outcomes, with no clear favourite at this stage
Polymarket: Balance of Power – US Congress
For the overall market direction, the election result may matter less than is sometimes assumed. Across election cycles, we tend to see higher volatility leading up to the election, but the volatility will ease when the result is known. In the event of a close election result, a recount or dispute could extend market volatility, but only temporarily.
The US equity market returns tend to be positive in the 6 months after the elections, regardless of the result. Our graph shows the historical annual average returns for the four possible scenarios, highlighting that equities can rally both in case of a Democratic or a Republican president.
Under a Trump presidency, we would expect fiscal easing for both companies and households as a result of the extension of existing tax cuts. This tends to be positive for equity markets, but the tailwind may be offset by higher import tariffs, which would not only hurt Chinese and European exporters but also potentially raise costs for US companies and households, boosting inflation. In turn, this could lead to slower Fed rate cuts.
Historical annual returns of US stocks under four scenarios
From a sector perspective, we have recently seen that cyclical sectors and those potentially benefitting from deregulation (including technology, consumer discretionary, and financials) have performed well when Donald Trump’s polling numbers have improved. However, a reduction in immigration could weigh on sectors like construction and hospitality, as they rely on access to foreign workers, while higher tariffs could increase the cost of inputs for the industrials and consumer discretionary sectors.
If Kamala Harris wins, there are offsetting factors, too. Continuity with the Biden administration may reduce uncertainty and could be a positive for markets. However, fewer tax cuts compared to a Trump presidency could be viewed as a negative. Climate change-related investments would see policy support, while the effort to re-onshore manufacturing are expected to continue. Whoever wins the presidency, if there is no clean sweep, policies would be less ambitious, reducing the market impact.
The current market action suggests that investors have been reducing concentrated positions in their portfolios to avoid being wrong-footed on election day. For example, popular overweight positions in technology have been reduced, while investors have been adding to traditionally less favoured utilities and real estate stocks. As previously noted, we have been broadening our sector exposure beyond technology to include US financials, industrials, communications, and healthcare.
Given the unpredictability of the elections and our view that the volatility is only temporary, we continue to base our investment strategy on other factors, namely Fed rate cuts, solid earnings, and resilient economic growth. These supportive fundamentals continue to warrant a bullish US equity stance. As for bonds, we continue to lock in yields of quality credit. Stronger-than-expected economic data have driven up yields in the past weeks, providing an opportunity to lock them in as cash rates continue to decline.
US election scenario grid
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