While the electoral impact of last week’s US presidential debate
is unclear, our Global Head of Fixed Income and Thematic Research
offers two guiding principles to navigate the markets during the
election cycle.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan
Stanley's Global Head of Fixed Income and Thematic Research.
Along with my colleagues bringing you a variety of perspectives,
today I'll be talking about takeaways from the US presidential
campaign debate.
It's Wednesday, September 18th at 10:30am in New York.
Last week, Vice President Harris and Former President Trump met
in Philadelphia for debate. Investor interest was high, and
understandably so. As our Chief Economist Seth Carpenter has
previously highlighted in his research, visibility remains low
when it comes to the outlook for the US in 2025.
That’s because the election could put the country on policy paths
that take economic growth in different directions. And of course,
the last presidential debate in June led to President Biden’s
withdrawal, changing the race dramatically. So, any
election-related event that could provide new information about
the probability of different outcomes and the resulting policies
is worth watching.
But, as investors well know from tracking data releases,
earnings, Fedspeak, and more, potential catalysts often remain
just that – potential. For the moment, we’re putting last week’s
debate in that category.
Take its impact on outcome probabilities. It could move polls,
but perhaps not enough for investors to view one candidate as the
clear favorite. For weeks, the polls have been signaling an
extremely tight race, with only a small pool of undecided voters.
While debates in past campaigns have modestly strengthened a
candidate’s standing in the polls, in this race any lead would
likely remain within the margin of error.
On policy, again we don’t think the debate taught us anything
new. Candidates typically use these widely watched events to
influence voters’ perceptions. The details of policies and their
impact tend to take a back seat to assertions of principles and
critiques of their opponents. This is what we saw last
week.
So if the debate provided little new information about the impact
of the election on markets, what guidance can we offer? Here
again we repeat two of our guiding principles for this election
cycle.
First, between now and Election Day, expect the economic cycle to
drive markets. The high level of uncertainty and the lack of
precedent for market behavior in the run-up to past elections
suggest sticking to the cross-asset playbook in our mid-year
outlook. In general, we prefer bonds to equities. While our
economists continue to expect the US to avoid a recession, growth
is slowing. That bodes better for bonds, where yields may track
lower as the Fed eases, as opposed to equities, where earnings
may be challenged as growth slows.
Second, lean into market moves that election outcomes could
accelerate. For several months, Matt Hornbach and our interest
rate strategy team have been calling for a steeper yield curve,
driven by lower yields in shorter-maturity bonds. They have been
guided by our economists’ steadfast view that the Fed would start
cutting rates this year as inflation eases. We doubt that
policies in Democratic win scenarios would change this trend, and
a Republican win could accelerate it in the near term, as higher
tariffs would imply pressure on growth and possibly further Fed
dovishness. Pricing that path could steepen the yield curve
further.
And of course, there’s still several weeks before the election to
get smart on the economic and market impacts of a range of
election outcomes. We’ll keep you updated here.
Thanks for listening. If you enjoy the podcast, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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