Financial markets can be sensitive to news cycles, but our Global
Head of Fixed Income and Thematic Research offers a word of
caution about reacting to recent headlines about the US
presidential election.
----- 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 development in the upcoming US
elections.
It's Wednesday, July 17th at 10:30am in New York.
Financial markets are starting to reflect the possibility of a
Trump presidency. Investors may be taking cues from a few current
developments. There’s the recent weakening of President
Biden’s polling numbers in key swing states such as Pennsylvania,
Michigan and Wisconsin. There’s also the ongoing discussion about
whether he will remain the Democratic nominee. And there's also
former President Trump’s increased win probabilities in
prediction markets, as well as the perception that Democrats will
have more trouble pursuing their agenda in the wake of the
assassination attempt against him.
To that end we’ve seen moves in key areas of markets sensitive to
what we have argued will be the policy impacts of a Trump
presidency, including a steepening of the US Treasury yield
curve. But – a word of caution. These market reactions to recent
political events may be rational, but it's not clear they’re
sustainable.
First, there are plausible ways investors’ perceptions of the
likely outcomes of this election could shift. Voters can have
very short memories, resulting in polls shifting to partisan
priors. This happened with popular opinion on elected officials
following notable incidents in recent years – such as the events
of January 6th, 2021, the US withdrawal from Afghanistan, and
more. Also, if President Biden were to withdraw as a candidate,
it’s possible investors could perceive that a different candidate
could tighten the race. For example, there have been recent
surveys showing alternate Democratic candidates polling better
than President Biden.
Second, there’s also room for investors to misunderstand the
policy path that could follow an election outcome as well as the
impact of that path. For example, we’ve seen some recent
press articles linking the broadening out of positive performance
in the equity market to the likelihood of a Trump win on
perceived benefits of friendlier tax policies that might result
from this outcome. But if investors only focus on that
policy, they’re not incorporating the potential offsetting
effects that could come from policies that could challenge the
economic growth outlook, such as higher tariffs – something
former President Trump has advocated for.
So bottom line, it makes sense to interrogate what seems like
clear links between the upcoming election and markets.Some
linkages are strong, and it’s possible that will
make for a good investment strategy; others
are weak and may break under scrutiny. We’ll help you sort
it out 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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