David Randall
NEW YORK (Reuters) – Investors fixated on earnings and monetary policy are starting to consider another variable that could affect markets this year: the 2024 U.S. presidential election.
In his State of the Union address on Thursday, US President Joe Biden proposed raising corporate taxes, while his opponent, Republican candidate Donald Trump, signed legislation in 2017 that cut taxes on companies and the wealthy. Biden also boasted about U.S. economic progress during his time in office.
It’s difficult to gauge how these proposals, and anything else the presidential candidates might put on the table in the coming months, might affect asset prices. The winner will likely face a narrowly divided Congress, making it difficult to pass legislative changes.
That hasn’t stopped some strategists from assessing how the political outlook may combine with other factors that influence markets. These include excitement about the business potential of artificial intelligence and changing expectations about how soon the Federal Reserve will be able to ease monetary policy. Since the beginning of the year, the index is up about 7.4% and is near a record level.
“You have a sense (investors) … have a lot on their plate right now, and politics are starting to come into it,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. “Even though everyone knows the candidates, it will be a pretty tight race, so it’s very difficult to predict the outcome.”
Opinion polls show Biden, 81, and Trump, 77, virtually tied. Although the U.S. economy is performing better than most high-income countries, Americans generally give Trump higher marks in economic polls.
Biden on Thursday proposed increasing to 21% the 15% minimum corporate tax on companies reporting profits of more than $1 billion, which he won as part of the Clean Energy Act of 2022.
He also promised to renew his proposal for a “billionaires tax,” which would impose a minimum tax of 25% on the income of Americans with assets of more than $100 million.
However, “any tax policy proposal will be hard to get past either party because it will come down to party lines,” said Larry Tentarelli, chief technology strategist at Blue Chip Daily Trend Report.
Regardless of the election results, fiscal policy will likely be one of the first issues the next administration tackles, Wells Fargo analysts wrote.
Republican policies will likely mean the 2017 tax cuts will be extended at the expense of higher inflation, while Democratic policies will result in higher taxes on higher-income households and corporations, the firm noted.
ELECTION YEAR TRENDS
The S&P 500 averaged 15.5% gain in years when a president sought re-election, CFRA data showed, dating back to the end of World War II. By comparison, the overall average annual return for this period was 12.8%.
At the same time, election years bring their share of instability. Analysts at BofA Global Research noted earlier this month that in previous election years, the Cboe Volatility Index rose an average of 25% from the second quarter through November.
Volatility tends to fall after Election Day, when uncertainty has been resolved, the company says. The bank recently raised its target for the S&P 500 from 5,000 to 5,400.
October Cboe Volatility Index futures, which include options contracts expiring before the middle of next month, recently traded about 2.6 points higher than September futures, indicating investor wariness about election-related market swings.
Historical trends may also favor Biden. Since Super Tuesday in 1976, the S&P 500’s rise in the lead-up to primaries has coincided with the president’s political party winning the election 80% of the time, according to LPL Financial (NASDAQ:).
However, the firm noted that the S&P 500 index has been rising recently along with Trump’s rating in national polls.
“This economy is doing well – and we’ll see if Biden gets credit for it,” said Jeff Buchbinder, chief equity strategist at LPL Financial.
ATTENTION TO CPI
The market also had to digest a mountain of near-term economic data to assess the Fed’s monetary policy path.
U.S. job growth accelerated in February, Labor Department data showed on Friday, but rising unemployment and slowing wage growth kept an expected rate cut on the agenda for June.
Investors are also looking to U.S. consumer price data on March 12 for further clarity on whether inflation has eased enough for policymakers to lower borrowing costs in the coming months.
“The continued normalization of wages, coupled with weak CPI readings next week, could boost the FOMC’s confidence that inflation is on track to return to target, potentially pushing forward the prospect of rate cuts,” wrote Jeff Schulze, head of economics. and ClearBridge’s market strategy. Attachments.