The US: American bye?


24 Oct 2023

The US appears to be in turmoil, politically and economically, leading some to question if it is still exceptional. But all is not lost for investors, says Andrew Holt.


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The US appears to be in turmoil, politically and economically, leading some to question if it is still exceptional. But all is not lost for investors, says Andrew Holt.

The US faces unprecedented uncertainty. Take the political picture. Come November next year Donald Trump could return to the White House, or, he could be in jail. That is a stark and truly unparalleled difference.

Then there is the economy. The US economic outlook has continually shifted. In chronological order, the outlook has gone from soft landing to hard landing, no landing, crash landing, hard landing and now, it seems, a soft landing again.

But then there are added twists: such as the time lags between the Fed’s aggressive rate hikes and the impact on the economy. With some suggesting the US could yet tip into a recession. This makes the US outlook unpredictable to say the least.

That said, indications suggest third quarter growth is doing nicely, thank you very much. Hardly putting the US on the precipice of a recession, but it is adding to the uncertain picture.

What are investors to make of it all? Let’s take the political charade first.

Will the Trump and Biden show have an impact on investors? Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, is unperturbed. “It’s challenging to opine on markets this far out ahead of a presidential election. The obvious issue is we don’t know who the candidates will be and what their agenda will look like,” he says.

The big fight

Indeed, while a straight fight off between Biden and Trump is expected, it is not inevitable. Given that while the incumbent president, Joe Biden, will seek re-election, there is the potential for health issues preventing this from happening. In particular, his embarrassing gaffes have become a daily occurrence.

Then running against him, the Republican nominee, based on polling, will be Donald Trump. But on-going legal troubles continue to cloud this backdrop. It may prevent him from accepting the Republican nomination.

If this ends up being the case, the American political system could go into meltdown, given the strong support Trump maintains through a proportion of the American population.

Richard Tomlinson, chief investment officer at Local Pensions Partnership Investments, ponders what it could mean from a geopolitics perspective if Trump was to return to the White House next year. “There will be challenges, for sure,” he says. “How might this impact the China-America relationship? What impact could that have on investment opportunities?”

It is worth remembering that when Trump won the presidency in 2016, the S&P500 jumped by 12%. In recent history, the biggest fillip to the S&P by a presidential election was when Bill Clinton won his second term in 1996, which resulted in a 23% boost. The worst came when Barack Obama was elected president for the first time in 2008, which resulted in a dramatic drop of 37%, according to Morningstar.

Winners and losers

When it comes to the run up to the election itself, it poses negatives and positives for Tomlinson. “The election creates problems and opportunities,” he says. “Governments and politics are now defining investment winners and losers, in terms of sectors, and particularly in green energy.”

Although some of the pre-election fervour can be attributed to nothing more than political noise – albeit with the volume turned up to maximum – which may not necessarily shape the nature of the markets.

In addition, the positive US outlook, based on a soft landing, and the fundamentals in the economy suggest the country overcoming its recent difficulties. A point made by Raffaele Savi, head of systematic equity at Blackrock. “So far in 2023, equity markets have shrugged off banking stress, recession risk and monetary tightening in favour of a more optimistic view,” he says.

So on this basis, if it was a road trip, the US economy has overcome some big bumps in the road, but now a clear route has opened up ahead. One like Route 66, clear and enjoyable. Janasiewicz concurs on such a scenario. “We remain in the soft landing camp based on our current economic outlook. This leads us to favour risk-on assets, preferring equities over bonds and the US relative to the rest of the world,” he says.

One assessment says the soft landing scenario is already evident in the data. Goldman Sachs suggests US equity cyclical stocks have outperformed defensive stocks by almost 12% across June, July and August. Goldman Sachs says the equity markets are, therefore, predicting 2% GDP growth this year as a result.

Hard to ignore

This is a source of debate. “The US economy continues to evolve,” Tomlinson says. “The next three to six months are hard to call.”

But Tomlinson adds that from an institutional investor perspective, especially with a long-term timeframe, it is difficult to ignore the US. “We have significant exposure to US equities. It is hard not to have a meaningful exposure to the US. If you don’t, you will be way o the benchmark.”

There is no doubt that the US equity market is in a good place. But this is unlikely to last, says Aron Pataki, co-head of real returns at Newton Investment Management. “The US equity market could continue, but if history is a good guide, and I think it is, then returns are going to be subdued, poor in the medium term from here. Because interest rates are high and valuations are elevated,” he says.

This presents its own uncertain view for investors, without the added complexity created by the election and all its shenanigans.

Janasiewicz says we can though highlight some observations in reference to US presidential elections from history about the shape of markets to come. “The first being that markets, from a seasonality perspective, tend to rally several months into the heart of the election campaign,” he says.

Here Janasiewicz highlights that July through to September have historically been strong months for the stock market in election years, ultimately giving way to some weakness up until election day, and then finally resuming an upward trend. He also sees similar seasonal patterns in implied volatility for equity markets, with a notable uptick in volatility beginning in September and rising through election day and then finally seeing pressures abate into the end of the year.

But given the unique and potentially divisive nature of the election ahead do historical precedents still stand?

Congress is king

Although another factor in not getting too carried away about the political situation impeding on the market is that presidential elections tend to have a limited impact on the direction of the markets given that Congress ‘controls the purse strings,’ Janasiewicz says.

And he adds that again looking at historical return patterns, markets do best under a Democratic presidency accompanied by a split Congress while a Republican president with a split congress has less robust outcomes.

“And while a Democratic-led Washington tends to see higher stock market returns, what matters most is the economic backdrop,” Janasiewicz says. “By far and away, earnings growth matters more so than the political landscape.”

And as the mantra goes – once you give corporate America the rules by which they must play, they’ll figure out how to make money. “Never underestimate the flexibility and dynamism of corporate America and the US economy,” Janasiewicz says.

Big checks

Another factor tending towards calm is that while the political climate in the US has become increasingly more polarized over the years, the system of checks and balances central to the US political system has prevailed. Although they have been severely tested at times.

It is this system of checks and balances that prevent a significant deviation from current polices that can upset the apple cart from an economic perspective and create real uncertainty for investors.

“Sure, we have seen the power of fiscal spending more recently but monetary policy still remains largely independent, despite what some may argue,” Janasiewicz says.

Although how much fiscal latitude Washington has going forward given that the deficit has been a hot button issue will remain critical. “How the economy evolves from now until election day will be key in terms of opportunities or challenges towards investing,” Janasiewicz says.

He adds that he doesn’t expect much to change in terms of economic drivers from the US political backdrop in the run-up to the election next year. “Rather, chair Powell and the Fed are the more important inputs. Inflation, the labour market and growth prospects all carry a far heavier weight than the debates or polling.”

Campaigning hot air

Putting some numbers to the impact of US elections on the market, it is interesting to note that there have been 23 elections since the S&P500 began. In these election years: 19 of them (83%) provided a positive performance. Which bodes well for investors.

When a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11%. When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%. Based on these numbers, investors have little to fear.

Another issue to consider in the run up to election is the nature of political campaigning itself and its overall impact. Campaigns almost always increase the noise leading up to an election: it is its job after all.

But the noise often outweighs the substance, with candidates frequently outlining in their stumping policies that often get watered down or sometimes lost, but rarely get implemented as promised. So the concern for markets the debates often throw up can be dismissed frequently as hyperbole.

Janasiewicz defines the real players in the US political environment. “The president and Congress can certainly help in providing a fertile background in which businesses operate. But aside from this, the impact is somewhat muted,” he says. “The economy matters more and the political backdrop has far less of influence here than most give credit.”

Here we return to the favourite maxim of Bill Clinton’s adviser James Carville: It’s the economy stupid.

Exceptional America

There could also be another explanation for what is happening in the US. Richard Tomlinson puts the potential parlous position of America in a wider perspective. “It is about America exceptionalism. It is about one question: Is America still exceptional?”

This puts into question America’s position in the world, one where it could well be no longer the hegemonic political and economic kingmaker: a position it has held since the Second World War. This has implications far beyond the 2024 US presidential election.

“Some are saying the era of America exceptionalism is coming to an end. But there are pretty good reasons why that is not the case,” Tomlinson says. “Being the world’s dominant reserve currency gives you a massive privilege. The US is also still the major superpower. Until that changes, America will remain appealing as a relatively stable and dynamic market.”

It is true that, despite all the noise surrounding the election, the US market is hardly in decline. This is seen through the so-called ‘super-7’ US stocks: Apple, Microsoft, artificial intelligence specialist Nvidia, Amazon, Meta, Tesla and Alphabet, which now make up more of the global equity index (MSCI ACWI) than the whole stock markets of Japan, the UK, China and France combined. That screams strength not weakness.

Bringing all arguments back to the market, Tomlinson offers a straightforward and balanced assessment to the impact of the US election and its position in the world as the leading nation.

“If you look at some US stocks, it maybe does look ominous in some areas. And the US does face some significant challenges. There is no doubt about that,” Tomlinson says. “But we are not seeing the end of America anytime soon.”


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