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Markets in times of elections

With the November U.S. presidential election approaching, and with former President Trump leading in the polls while President Biden endorses Vice President Kamala Harris, a key question arises: how do elections affect markets and portfolio returns?

Do elections matter in the long run?

To answer this, let’s look at some historical data. Surprisingly, markets have trended upward no matter which party wins the election. Since 1933, with eight Democratic presidents and seven Republican presidents, the market trend has always been upward. The key is to stay invested!

Landslide victory or balance in Congress?

It’s not just the presidential election that matters. Markets have had good returns regardless of how Congress is composed. Since 1933, there have been 44 years in which one party controlled both the presidency and Congress, with an average return of 14.4%. Even with a divided Congress, returns were almost as good at 13.7%. And even when Congress was of the party opposed to the president, returns were still in double digits (11.7%).

Investor Behavior

Elections impact investor behavior. During election years, many tend to opt for lower-risk instruments. However, right after the election, equity funds tend to see the largest net inflows. This indicates that investors prefer to minimize risk during election uncertainty and reconsider riskier assets once it passes.

Changing strategy during these years can limit long-term portfolio returns.

The history is clear: those who stayed on the sidelines during election years performed worse on 17 occasions, and better on only 3. In contrast, those who stayed invested or made monthly contributions achieved higher average balances.

Conclusion

Although presidential elections can influence market behavior in the short term, staying invested for the long term has proven to be a winning strategy.

Hypothetical historical growth of a US$1,000 investment in the S&P 500

Note: Party control dates are based on opening dates. Values are based on total returns in USD.
Source: Capital Group

Three hypothetical US$10,000 investment strategies during an election cycle

Note: Returns and portfolio values are calculated monthly and in USD. The analysis begins on January 1 of each election year and reflects a four-year holding period. Past performance is not predictive of results in future periods.
Source: Capital Group

Global Wealth Report 2024: Keys and Trends

The Global Wealth Report 2024, which analyzes the trends and dynamics impacting the global economy, is now available, and here are the highlights.

Recovery since 2022

2023 marked a positive change in global wealth, recovering from a drop in 2022. Global wealth increased by 4.2% in USD terms, thanks to the EMEA (Europe, Middle East and Africa) region, which grew by 4.8%. This recovery is due to the stabilization of global markets, the post-Pandemic economic recovery and an improved investment climate in key regions.

Wealth Distribution

Over the past two decades, the distribution of wealth has changed dramatically. The proportion of individuals with wealth below USD 10,000 has halved, while the highest levels of wealth have increased significantly.

What does this mean? The trend indicates that more and more people are achieving higher levels of wealth, reflecting an increase in the value of assets in various markets. However, global wealth inequality shows different dynamics:

  • North America has experienced a slight decrease in inequality.
  • In contrast, certain parts of Asia and Eastern Europe have seen increases in inequality.

This change in the distribution of wealth is a key indicator of global economic and social dynamics.

Regional Performance

  • Asia-Pacific: Continues to show the fastest growth in wealth, driven by rapid economic expansion and the rise of the middle class. However, this growth is accompanied by rising levels of personal and corporate debt, raising concerns about sustainability.
  • North America: Especially in the United States, wealth growth has been robust due to strong stock market performance and high real estate values. Wealth inequality has seen a slight decline since 2008, thanks to various socioeconomic policies.
  • Western Europe: Shows mixed economic performance. Countries such as Germany and Switzerland continue to see a significant increase in wealth, while others face economic stagnation due to challenges such as political instability and a slower post-Pandemic economic recovery.

Inflation and Exchange Rate Effects

In 2023, inflation-adjusted real wealth growth reached 8.4%, highlighting significant gains compared to the previous year.

What drove this growth? Primarily, lower global inflation rates played a crucial role. In addition, currency fluctuations had a major impact, affecting wealth performance in countries such as Japan and the United Kingdom.

This real and inflation-adjusted growth underlines market resilience and recovery capacity.

Deceleration Trend

The report reveals a gradual deceleration in global wealth growth from an annual average of 7% between 2000 and 2010 to just over 4.5% between 2010 and 2023.

Why is this happening? Primarily due to market saturation in developed economies and economic volatility in emerging markets.

However, there is good news: the number of top wealth individuals is projected to increase significantly by 2028, with emerging markets accounting for nearly 32% of global wealth. This projection is based on continued economic growth and rising asset values in these regions.

In addition, a significant transfer of wealth is anticipated over the next two to three decades, with USD 83 trillion (trillion in U.S. values) expected to be transferred. A substantial amount of this wealth will be passed between spouses before reaching the next generation.

Distribution of global wealth by region in 2023

Source: UBS

Decent hiring in June, although decelerating

The U.S. economy added 206,000 jobs in June. However, it was notable that the report revised down previous estimates of job creation in May and April. According to the consensus estimate, the economy was expected to add 190,000 jobs in June from the 272,000 originally reported in May, a figure that was adjusted to 218,000. In addition, the April hiring increase was revised to 108,000 from 165,000. With these revisions, the June employment report showed a slowdown in the three-month moving average for hiring. The report also highlighted that the increase in new jobs was led by government, health care, social assistance, and construction. Conversely, several sectors experienced declines, including professional and business services and retail trade.

On the other hand, the unemployment rate, which had been expected to remain at 4.0% from May to June, rose to 4.1%, placing it at its highest point since October 2021. This level of unemployment is more aligned with the macroeconomic scenario recently shared by the Federal Reserve (Fed). That said, it is important to mention that, in June of last year, the unemployment rate stood at 3.6%.

As for wages, the average hourly wage increased 0.3% during the month, which implied an annual advance of 3.9%, both figures in line with estimates, although the latter below May’s 4.1% annually. The average workweek remained stable at 34.3 hours.

This deceleration in employment generation, and subject to confirmation by the end of the week that June inflation may have dropped to 3.1% annually from 3.3% according to the market forecast, should be factors that, in turn, could allow the Fed to implement a first 25 bp cut in the reference rate during the September 18 meeting. In this context, the consensus odds of seeing a cut stand at 73%, up from 46% about a month ago.

Monthly Change in Nonfarm Payroll – 3 month moving average

Source: Morningstar

Federal funds rate expectations for the September 18, 2024 meeting

Source: Morningstar – CME

Expectations for the 2Q24 earnings season

Corporate earnings season for the second quarter of the year will begin in two weeks, with several large banks such as JP Morgan, Citi and Wells Fargo reporting on July 12. Mega-cap technology companies will begin reporting later in the month, most notably NVDA, which will report through August 23.

In this context, the consensus estimates that earnings per share (EPS) of the companies comprising the S&P 500 could grow by 9% annually, which would represent the strongest growth since the 4Q21. Earnings are expected to decline only in the Materials (-11% annually) and Industrials (-1%) sectors. In contrast, the Technology (+17%) and Communication Services (+17%) sectors are anticipated to show the fastest growth compared to other sectors, led by mega-cap tech stocks. Overall, the top six S&P 500 stocks (AMZN, AAPL, GOOGL, META, MSFT and NVDA) are projected to grow their Q2 EPS by 30% annually, while the other 494 companies will grow by 5%.

Another relevant fact is that revisions to consensus estimates have been unusually resilient recently. Typically, quarterly consensus EPS estimates are usually reduced by 7% during the 6 months leading up to the start of earnings season. However, over the past six months, the 2Q24 EPS consensus estimate has barely declined by 1%. Excluding mega-cap tech companies, analysts have cut EPS estimates by 3%.

On the other hand, analysts are forecasting sales growth of 4% annually for the period. With this combination of factors, the companies’ net income margins, excluding the energy sector, are expected to stand at 11.7%, which represents an increase of 58 basis points (bps) annually, albeit only a 14 bps increase quarter-over-quarter (2Q24 vs. 1Q24). The recent slowdown in labor and material costs suggests that this margin forecast could be achievable.

With all of the above, EPS for S&P 500 companies is expected to grow 9% for the full year compared to 2023, with sales growth of 5%. Undoubtedly, the quarterly reporting season that is about to begin will be a near-term catalyst on investors’ radar, given the strong performance the S&P 500 has experienced so far this year.

Consensus forecast for the 2Q24 earnings season (annual growth)

EPS means earnings per share

SPS means sales per share

Source: Goldman Sachs – Facset

Consensus estimate for the 2Q24 EPS growth of +9% is the highest since 2021

Source: Goldman Sachs – Facset

Catalysts for the second half of the year

As we approach the start of the second half of the year, we highlight the strong performance of the S&P 500, which has accumulated gains of approximately 15%. This performance primarily reflects optimism around artificial intelligence (AI), resilience in corporate earnings, and expectations of a potential Federal Reserve (FED) reference rate cut. Here are the key events that investors will be watching closely for the remainder of the year:

2Q24 and 3Q24 Earnings Season: Second-quarter earnings season is scheduled to begin during the second week of July, led by JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). Annual earnings growth of 8.8% is estimated for S&P 500 companies, marking the highest rate since the first quarter of 2022 (+9.4%). For the third quarter (3Q24), potential growth of 8.2% annually is forecasted, which could lead to an 11.3% annual increase in corporate earnings for the full year 2024.

Other Geopolitical Events: The United Kingdom will hold early elections on July 4, determining the composition of its Lower House, and ultimately the country’s next government. In France, the second round of parliamentary elections will be held on July 7, where the far-right Rassemblement National (RN) party won a historic 31.4% of the vote for the European Parliament, beating the 14.6% obtained by Macron’s party.

Boom in Artificial Intelligence (AI): More than 18 months after the launch of ChatGPT, the growing adoption of AI has significantly boosted the markets. Companies such as Microsoft, NVIDIA, Apple, Alphabet, Amazon, and Meta have contributed 64% of the global stock market’s total return since then. In June, NVIDIA became the world’s largest publicly traded company. This growth suggests that capital expenditure (CAPEX) in AI could continue in the coming months, further strengthening earnings growth for the sectors involved, such as semiconductors, which could grow 50% this year and 25% by 2025. As the AI ecosystem grows, it is estimated that CAPEX for developers could reach US$331 billion by 2027.

Interest Rate Cuts: Slower economic growth and expectations of a slowdown in inflation could lead to further rate cuts by central banks such as the Swiss National Bank, ECB, and Bank of Canada. On the other hand, the Bank of England’s first cut is projected to be in August, and the FED is expected to implement its first 25 basis point cut on September 18.

U.S. Presidential Elections: On November 5, U.S. voters will decide the outcome of the presidential election. Democratic President Joe Biden and former Republican President Donald Trump will face off in key debates scheduled for June and September. Current polls show a slight advantage for Trump, although a significant proportion of voters are still undecided. Historically, election years have tended to generate positive returns in the markets, with the S&P 500 posting an average historical return of 10.1% since 1937.

Some key dates for the second half of 2024

Source: UBS

Global central banks adjust their strategy 

By the end of 2023, global central banks were poised to initiate significant interest rate cuts. However, as the year progresses, persistent inflation and economic resilience led to a reassessment of these expectations. In this context, we share some of the perspectives they recently conveyed to the markets.

Federal Reserve (Fed):

• Revised projections: Fed Chairman Jerome Powell noted earlier this year that initial projections of multiple rate cuts were too optimistic. The new expectation is for only one or two rate cuts by the end of 2024, rather than the three previously anticipated.

• Economic resilience: Despite inflationary pressures, the U.S. economy and labor market showed resilience, which implies closer monitoring prior to implementing cuts. 

European Central Bank (ECB):

• Monetary policy tightening: The ECB recently made a modest rate cut, although it emphasized a cautious perspective due to continued inflation and economic uncertainty. In particular, its members warned of “bumps in the road” as they navigate these challenges.

• Geopolitical concerns: Events such as French President Emmanuel Macron’s decision to call early parliamentary elections added uncertainty, influencing market expectations and possible forward-looking decisions by the ECB. 

Bank of England (BoE):

• Rate cuts delayed: The BoE postponed on several occasions the anticipated rate cuts, which could materialize in the third quarter of the year, in line with consensus forecasts. This is despite a significant reduction in headline inflation, as steady wage growth keeps the BoE cautious.

As can be seen, the desired 2024 monetary easing cycle has lost momentum, largely due to persistent inflation, particularly in sectors such as services and robust economic activity. Central banks have therefore found it necessary to recalibrate their strategies to a more cautious approach, which could involve more gradual adjustments to short-term interest rates, so that this move allows them to bring inflation consistently toward their long-term targets.

Expectation for the monetary policy of Central Banks in Developed Countries

Source: Capital Group

Foresees one rate cut for the remainder of this year

Prior to the Federal Reserve (FED) announcement, it was reported that May’s inflation decelerated to 3.3% annually, compared to the expected 3.4% and the previous month’s rate. It is important to note that, on a monthly basis, inflation remained unchanged. Core inflation also improved, coming in at 3.4% annually compared to the expected 3.6% and the forecasted 3.5%. In this context, the FED made the unanimous decision, widely anticipated by the market, to maintain the target range for the federal funds rate at 5.25% – 5.50% (its highest level in the last 22 years).

The statement reiterated that the latest employment indicators have shown solid performance, while inflation has decreased over the past year, although it remains elevated. It highlighted that there has been modest progress toward the Committee’s 2% inflation target in recent months. Therefore, the Committee reiterated that it does not expect it to be appropriate to reduce the target range of the reference rate until there is greater confidence that inflation is moving sustainably toward its objective, while remaining very attentive to inflation risks.

On the other hand, the FED updated its macroeconomic outlook, significantly adjusting expectations for possible cuts to the reference rate. It now anticipates only one cut of 25 basis points (bps) for the remainder of the year, down from the March estimate, which suggested the possibility of three cuts (the market had been expecting two cuts). Thus, the federal funds rate would end the year at an average of 5.1%, compared to the current 5.4% and the previously anticipated 4.6%. For 2025, the new estimate suggests that the rate would stand at 4.1%, up from the previously forecasted 3.9%. Regarding the economic outlook, the GDP growth expectation remains at 2.1% for 2024 and 2% for 2025. The unemployment rate did not undergo significant changes for either year, remaining around 4%. However, estimated core inflation (excluding volatile components such as food and energy), measured through the Core PCE, rebounded slightly to 2.8% from 2.6%, while the estimate for 2025 rose slightly to 2.3%.

During his press conference, Jerome Powell commented that monetary policy is well-positioned and that if the economy remains strong and inflation persists at elevated levels, the FED would be prepared to maintain rates within the current range. He also emphasized that the FED’s estimates are not necessarily indicative of the decisions the Committee might take. Finally, Powell stressed the importance of seeing consistent improvement in inflation before applying a rate cut. He reminded that the baselines for inflation on an annual basis for the remaining months of the year will not be easy to surpass, which could result in continued elevated readings.

FED Indicators Update (June vs. March)

Source: Federal Reserve

Initial impressions of the election results in Mexico

With an advance of approximately 95% of the votes counted, Claudia Sheinbaum Pardo, representing the ruling coalition (Morena, PT and Green Party), will be the first woman president in 200 years of independent life in the Mexican Republic. In this sense, it is noteworthy that her victory was overwhelming having counted ~59% of the votes, which represented a difference of more than 30 points against the opposition candidate. With this, Claudia Sheinbaum registered more votes than López Obrador obtained in the 2018 elections and becomes the president with the most votes in Mexico’s history. Claudia Sheinbaum was previously head of government of Mexico City (2018-2023), head of the Tlalpan mayor’s office (2015-2017) and secretary of the Environment (2000-2006). On the other hand, citizen participation ranged between 60% and 61.5%, lower than that seen in 2018 which was 63.4% and the average of the last five elections which stood at approximately 65%.

In this context, the ruling coalition won 7 of the candidacies that were at stake, with an outstanding victory in Mexico City, as well as the victory in the state of Yucatan, which was governed by the opposition for many years. Regarding the new conformation of the Congress, it is expected that the ruling coalition will reach the constitutional majority in the Congress of Deputies and by a very small margin will obtain a qualified majority in the Senate. Therefore, the Morena party consolidates for the third consecutive time (2018, 2021 and 2024) as the first force in the Congress of Deputies and for the second time in the Senate of the Republic (2018 and 2024). The new Legislature (LXVI) of the Congress will begin its functions on September 1, 2024, where President López Obrador’s mandate will come to an end on the 30th of that same month. That said, the new legislature will coincide with the current president for 30 days. The inauguration of the new president will be on October 1.

Finally, some of the challenges that this new government will face during the first half of its six-year term will be related to reducing the budget deficit (around 6%, the highest in 25 years), the elections in the United States, the review of the T-MEC, capitalizing on the opportunities linked to nearshoring, avoiding institutional weakening and reducing insecurity rates in the country.

Recomposition of states governed by the ruling coalition (Morena and allies) vs. opposition bloc (PRI – PAN) and Movimiento Ciudadano. 

Source: Holland & Knight with information from INE

Consumption perspectives in the United States

The importance of the consumer within the U.S. economy cannot be underestimated, being the main engine of growth, accounting for ~70% of its Gross Domestic Product (GDP). For this reason, we present some perspectives because, so far, the consumer has shown resilience, supported by a strong labor market, excess savings in the wake of the pandemic, and wage increases. However, some deterioration has begun to show, which could imply some challenges in the short-term. Important points:

  • Deteriorating consumer sentiment and record indebtedness: Consumer confidence has now fallen for three consecutive months in the face of high interest rates and persistent inflation. On the other hand, household debt reached a record US$17.7 trillion in the first quarter of 2024, with default rates rising, especially on credit card debt. Despite this, debt servicing costs remain manageable because 75% of households have a mortgage with a 4% rate, compared to the current rate of around 7%.
  • Caution in consumption patterns, with healthy balance sheets: Consumers, especially in the lower income segments, are becoming more cautious with their spending. This trend was evident in recent retail sales reports, as well as in the recent quarterly reporting season, where companies such as Amazon and Pepsi emphasized a preference for more economical options. For their part, household balance sheets prevail strong, supported by a rising stock market, rising home values and higher interest rates on savings accounts, allowing families’ net worth to increase. The mix of these elements has been a key component in the resilience of consumer spending.
  • Real wage growth: The combination of healthy labor markets and the disinflationary process have contributed to growth in real incomes over the past 12 months. While there are some concerns that this favorable trend may stall as the labor market cools and inflation remains stable, there is reason to believe that this dynamic in wages will continue.
  • Increased signs of defaults: In this regard, the FED in New York cited that nearly 1 in 5 borrowers are now “maxed out” on their credit cards and that the percentage of balances moving into serious default (i.e., 90 days past due) has risen to the highest level since 2011. While this is usually a worrisome sign for an economy driven by consumer spending, total outstanding debt at some point in default (~3.3%) is still quite low.

Under this context, economic growth estimates for this year remain around ~2.3%, supported by modest employment generation, the ability to continue witnessing increases in real wages and household net worth at record levels (US$156 trillion at the end of 4Q23).

Household debt service payment as a percentage of disposable income

Source: Raymond James 

Key takeaways from the 1Q24 corporate reporting season

Practically in the home stretch, with just over 90% of the S&P 500 sample having reported their numbers, below, we share some relevant takeaways and perspectives from the first quarter earnings season of the year.

  • Reasonable earnings growth: Despite general economic concerns amid high interest rates and a pickup in inflation, S&P 500 earnings beat expectations after the index reported 6% annual growth in earnings per share (EPS), exceeding the anticipated growth of 3%.
  • Sector performance: The Communication Services (+38%), Utilities (+30%), Information Technology (+24%) and Consumer Discretionary (+24%) sectors posted the strongest annual earnings growth. While Brent crude oil prices in the 1Q24 prevailed unchanged versus the prior year, natural gas prices collapsed 24% and aligned more closely with the 26% and 21% annual decline in earnings in the Energy and Materials sectors, respectively. Finally, EPS in the Healthcare sector also declined 26%, albeit primarily due to Bristol-Myers Squibb’s (BMY) one-time expenses related to its acquisition of the Karuna company.
  • Mixed consumer signals: Companies in the Consumer Discretionary and Consumer Staples sectors provided mixed outlooks, with some noting a slowdown in consumer demand while others reported strength. For example, McDonald’s outlined a more selective spending, while American Express noted an 8% annual increase in customer spending.
  • Increased investment in Artificial Intelligence (AI) continues: Companies such as Amazon and Meta announced substantial investments (CAPEX) to improve their AI capabilities. In this context, this focus on AI is expected to drive future productivity gains and revenue expansion.
  • Performance and expectations of the “Magnificent 7”: This block of companies, comprising AAPL, AMZN, GOOGL, META, MSFT, NVDA and TSLA, reported combined earnings growth of 48% YoY. This robust growth was driven primarily by a substantial increase in their sales and a significant expansion of their profitability margins. For example, META and GOOGL led the group with a sales growth of 27% and 15%, respectively. In contrast, AAPL and TSLA experienced sales declines of 4% and 9%, respectively. The outlook for these companies remains strong, especially for those investing substantially in AI. Although their numbers were positive overall, there is significant dispersion among their financial results within the group.

Market forecasts: Based on the above, the consensus estimates that the EPS of the S&P 500 for the whole of 2024 would reach US$244, which would imply an annual growth of 9%. By 2025, the EPS would reach US$277, which would represent an annual increase of 13%.

S&P 500 sales, margins and earnings growth in the 1Q 2024:

  • EPS refers to earnings per share.
  • SPS refers to sales per share. 

Source: Goldman Sachs

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