Following the historic decision by President Biden to drop out of the 2024 race, Raymond James CIO Larry Adam provides insight into his team's economic and market outlook.
To read the full article, see the Thoughts on the Market publication linked below.
Election cycles are unpredictable, and the 2024 presidential election cycle has proven to be no exception with President Joseph Biden choosing to drop out of the race. Following the historic announcement we’re diving into the questions that are top of mind for investors – how will President Biden’s decision not to seek reelection impact the economy, fixed income and equity markets?
Going forward, with Vice President Kamala Harris likely entering the race against former President Donald Trump, our short- and long-term equity market views remain unchanged. With valuations in the 93rd percentile relative to history, we remain cautious on the equity market in the near term as a lot of good news has been priced into the market and investor optimism has reached extreme levels. However longer term, with earnings likely to move higher (as we do not forecast a recession), $6 trillion of cash on the sidelines, and as we are in the infancy of this current bull market, we would use any periods of weakness as an opportunity. The 2Q24 earnings season that ramps up this week and next will be very important to assessing the health and earnings growth of companies going forward.
We cannot emphasize enough that politics is only one of ten factors in our equity outlook framework. While politics can drive headlines and induce short-term volatility (both up or down), it only ranks eighth in the ranking of the most influential driving factors. The reason? Macro factors such as economic growth and Fed cuts, and fundamental metrics such as earnings growth and valuations are more important in determining the trajectory of the market. Case in point: the Energy and Financials sectors were the two best-performing sectors in the week following Trump’s election, as a deregulatory agenda boosted expectations for these sectors during his Presidency. But they ended up being the worst performing sectors, as macro factors such as reduced demand because of COVID pressured the energy sector and record low interest rates were a headwind for Financials.
Fast forward to today, the recent rotation into small-cap stocks has been explained by market pundits as “the market pricing in a potential Trump victory”. We see this as misguided. Instead, we believe the rally has been fundamentally justified as interest rates have fallen (and small-cap companies rely on debt financing), imminent Fed rate cuts (as inflation reports have shown a significant slowdown in pricing pressures), and the potential for small-cap stocks to exhibit their first quarter of positive EPS growth in six quarters in 3Q24. In many ways, the recent increase in the probability of a Trump win (and sweep) is coincidental with the fundamental improvement in small-cap stocks prospects.
As VP Harris likely represents a continuation of President Biden’s policies, there is no real change in our short-term economic outlook. With limited capacity for additional government spending on the horizon given budgetary constraints, the consumer will need to be the driving force of the economy. A softening labor market, rising delinquencies and a slowdown in travel-related spending is likely to lead to weakness in spending moving forward. As a result, we expect two Federal Reserve (Fed) interest rate cuts this year likely beginning in September to help the economy avoid a recession. While political rhetoric will abound if the Fed cuts, we view the Fed as apolitical and doing what it believes is in the best interest of the economy, not the political class. Longer term, the extension of (or lack thereof) the 2017 tax cuts is likely to impact the economy, but that does not occur until the end of 2025.
We expect the bond market to be driven by the fundamentals of economic growth and inflation. And with both likely on a downward trajectory, interest rates (particularly the 10-year Treasury yield) are likely to move lower by the end of this year toward 4%. With the Fed expected to begin cutting interest rates, the yield curve is likely to steepen with shorter-term rates falling faster than longer-term rates.
However, we are mindful of the burgeoning risks associated with the supply/demand dynamics. The trajectory for policy and the impact on government spending should not change with Vice President Harris entering the race. Admittedly, neither Republicans nor Democrats have really focused on containing the national debt. Both administrations added significantly to the overall level of debt (Trump +$8 trillion, Biden +$7 trillion). The good news: until now, the bond market has absorbed the additional issuance from increased spending as retail investors have picked up their pace of buying. Until demand starts to wane (not our base case yet but we continuously monitor), the market should remain reliant on the fundamentals of growth and inflation.
President Biden electing to drop out of the presidential race does not materially impact our view of the current standing of the race. The view of our political team continues to favor former President Trump; however, the potential for a Republican sweep probably gets more challenging as the shift at the top of the ticket is likely to help some down-ballot candidates. However, with over three months to go, the race is far from over and a lot can change between now and November 5. From an asset class perspective, our views are unchanged as current macro factors such as economic and earnings growth and a likely Fed cut in September remain intact. As always, as we approach election day, we will keep you apprised of our latest thinking and how it could impact on the economy and financial markets.
Read the full
Thoughts on the Market
All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Group, but not necessarily those of Raymond James & Associates, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Material is provided for informational purposes only and does not constitute a recommendation. Diversification and asset allocation do not ensure a profit or protect against a loss.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.
INTERNATIONAL INVESTING| International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
OIL Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
The Consumer Price Index (CPI) | is a measure of inflation compiled by the US bureau of Labor Studies.
Personal Consumption Expenditure Price Index | The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services.
DESIGNATIONS
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIEDFINANCIALPLANNER™ in the U.S.
Investments & Wealth Institute TM (The Institute) is the owner of the certification marks “CIMA” and “Certified Investment Management Analyst. ”Use of CIMA and/or Certified Investment Management Analyst signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
FIXED INCOME DEFINITION
AGGREGATE BOND | Bloomberg USAgg Bond Total Return Index: The index is a measure of the investment grade, fixed-rate, taxable bond market of roughly 6,000 SEC-registered securities with intermediate maturities averaging approximately 10 years. The index includes bonds from the Treasury, Government-Related, Corporate, MBS, ABS, and CMBS sectors.
HIGH YIELD | Bloomberg US Corporate High Yield Total Return Index: The index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/ BB+/BB+ or below.
S&P 500 | The S&P Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
KBW REGIONAL BANKING INDEX | The KBW Regional Banking Index is a benchmark stock index for the regional banking sector representing small to medium U.S. national regional banks.
RUSSELL 2000 INDEX |The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
NFIB SMALL BUSINESS OPTIMISIM INDEX | A composite of ten seasonally adjusted components, providing an indication of the health of small businesses in the US.
INTERNATIONAL DISCLOSURES FOR CLIENTS IN THE UNITED KINGDOM | For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counter parties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
FOR CLIENTS OF RAYMOND JAMES INVESTMENT SERVICES, LTD.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
FOR CLIENTS IN FRANCE | This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
FOR CLIENTS OF RAYMOND JAMES EURO EQUITIES | Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
FOR INSTITUTIONAL CLIENTS IN THE EUROPEAN ECONOMIC AREA (EE) OUTSIDE OF THE UNITED KINGDOM | This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
FOR CANADIAN CLIENTS | This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Source: FactSet, as of 7/22/2024
INTERNATIONALHEADQUARTERS:THERAYMONDJAMESFINANCIALCENTER 880 CARILLONPARKWAY// ST. PETERSBURG, FL 33716 // 800.248.8863 RAYMONDJAMES.COM
© 2024 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2024 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
