The Big Three (September 2024)

1 . Neck and neck in Pennsylvania

The race to become the next president of the United States could barely be closer. The arrival of Kamala Harris as the Democratic candidate has certainly shifted momentum away from former President Donald Trump, but it remains to be seen whether it is by enough for victory. The state most likely to decide the election remains Pennsylvania, where Harris currently leads in an average of the polls by just 1%, well within the margin of error. For investors the two candidates offer starkly different visions of the American economy. Trump promises to boost American business with aggressive tariffs on things like Chinese electric vehicles (no surprise perhaps then that Tesla’s Elon Musk has swung in behind him). Meanwhile Harris is offering a more modest vision, promising to support workers’ rights but backing away from aggressive tax measures on the rich. There is no reliable rule of thumb for whether the stock market rises best under Democratic or Republican presidents, yet we can say that there will be sub-sectors much more likely to thrive under each candidate. And as a general rule Trump’s policies, which restrict access to American markets, could be more inflationary, keeping interest rates higher for longer.

2 . The long road down

The world’s most powerful central bank, the Federal Reserve, is poised for its first rate cut in September. It still looks most likely that it will have achieved the rarest of feats – crushing inflation without causing a recession. However, it is not over until it is over. Some US economic data in recent days has suggested that the health of the US economy may not be as strong as had been thought, with data on jobs and new job openings showing some signs of weakness. The market is reacting to this news, leading to some market volatility in recent days. However, we believe that in truth there was always going to be a natural ebbing and flowing of optimism that this soft landing can be achieved. Our core view remains that the Federal Reserve is managing the situation well and that falling interest rates will provide any boost needed to the US economy.

3 . Thin gruel for the UK

History teaches us that new prime ministers and new chief executives like to get all the bad news out in one go at the start, ‘kitchen-sinking’ it. However, few incoming leaders have gone quite as far as Keir Starmer in promising pain ahead. He has emphasised the need for tax rises, benefits cuts and ever tightening spending budgets to fund public sector pay deals and catch up with what he claims are emergencies on all sides in the public services. Of course, it remains to be seen whether his gloomy predictions will come true - an upswing in the global economy triggered by falling interest rates could provide the fillip the UK needs to improve its prospects. The biggest driver of government borrowing and the UK’s fiscal position in the short-term is probably what happens to the global economy – quite outside of his control - and that is inherently not as predictable as politicians would have us believe. So perhaps there is still space for a little hope amidst the gloom.