Mar 26 / Alef Dias

Macroeconomics Weekly Report - 2024 03 26

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An initial analysis of the US elections

  • President Joe Biden and former President Donald Trump secured their parties' nominations, setting the stage for the first rerun of the US presidential election in almost 70 years.
  • Although it is still too early to predict the eventual winner, a rematch between Trump and Biden is likely to increase geopolitical and market uncertainties. Polls indicate widespread unpopularity for both, but Trump is ahead in the probability of victory according to polls and betting markets.
  • However, American markets tend to be resistant to political volatility. Looking at the performance of the S&P 500 from 1937 to 2022, for example, it can be seen that the average annual return is 9.9% in presidential election years and 12.5% in non-election years. The S&P 500 has not fallen during a presidential re-election year since 1952.
  • A favorable scenario for risk assets tends to be positive for commodities in general. The biggest impact should be on the energy complex: Trump's policies seem to be more favorable to fossil fuels, while renewables could benefit relatively in a Biden victory scenario.

Introduction

President Joe Biden and former President Donald Trump have secured their parties' nominations, setting the stage for the first rerun of the US presidential election in almost 70 years. With this in mind, we will analyze the likely main policies of each of the candidates and their impact on commodities and other assets.

How is the presidential race going?

Although it is still too early to predict the eventual winner, a rematch between Trump and Biden is likely to increase geopolitical and market uncertainties, as public sentiment towards both candidates remains tepid, with little enthusiasm for a rematch. Polls indicate widespread unpopularity for both, but Trump is ahead in the probability of victory according to polls and betting markets.

Ultimately, the candidates' chances and the impact on the markets will probably be guided by whether the US economy manages a soft landing, with volatility swings driven by politics. The historical record suggests that President Biden has a better chance of winning if the US avoids a recession.

Presidential victory odds (average bets, %)

Source: Real Clear Politcs

US recession probabilities (%)

Source: Bloomberg

What are the main policies of each candidate?

Table 1 shows how the political priorities of the two candidates differ. Basically, Biden signals continuity of policy and a more subtle stance on foreign and trade policy.

In contrast, a Trump presidency could bring more friction, both domestically (through immigration restrictions at a time when the labor market is tight) and to the rest of the world. One of his political priorities is to impose a 60% tariff on imports from China and a 10% tariff on other trading partners, including the European Union.

On the other hand, Trump plans to reduce US corporate taxes, which could be positive for risk assets in general - but especially for US stocks. The impact on financial markets will probably be determined by the sequence of implementation of his policy: will the proposed corporate tax cuts come before legislation on immigration and/or import tariffs?

Table #1: Main policies of each candidate

Source: Standard Chartered

Impacts on the energy complex

The US election could have major impacts on the energy sector. Trump would seek to undo much of the Biden administration's work on combating climate change if returned to office after the November election, and would launch new efforts to expand fossil fuel production.

While some biofuel tax credit programs are traditionally bipartisan, Biden's SAF grand challenge and other biofuel policies could be at risk in a Trump victory scenario. During Trump's first term, this was illustrated by a series of exemptions granted to refiners, exempting them from complying with the Renewable Fuel Standard (RFS).

Renewable Volume Obligation (RVO, USc/USG)

Source: Bloomberg

In Summary

History shows that US presidents are usually re-elected if the economy avoids a recession. The latest data was softer than expected. However, Fed chairman Jerome Powell has reiterated plans to cut rates later this year if the current disinflationary trend persists, which should help support growth.

Despite Trump's lead in the polls and other indicators, we are still only at the beginning of the electoral race, and the unpopularity of both candidates means that there will be high volatility during the electoral process. However, American markets tend to be resistant to political volatility. Analyzing the performance of the S&P 500 from 1937 to 2022, for example, it can be seen that the average annual return is 9.9% in presidential election years and 12.5% in non-election years. The S&P 500 has not fallen during a presidential re-election year since 1952.

A favorable scenario for risk assets tends to be positive for commodities in general. The biggest specific impact should be on the energy complex: Trump's policies seem to be more favorable to fossil fuels, while renewables could benefit relatively in a Biden victory scenario.


S&P500 returns after elections

Source: US Bank Asset Management Group

Weekly Report — Macro

Written by Alef Dias
alef.dias@hedgepointglobal.com
Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com

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