Quarterly Market Outlook: Q4 2024

The monetary policy turnaround has been confirmed by central bank statements and interest rate cuts, easing pressure on the economies in a context of weak growth. However, concerns remain about services inflation and signs of deterioration in employment, so it is early to talk about a soft landing.

The focus is now shifting to fiscal policy, where deficits remain high. Although fiscal dynamics have supported growth, concerns about fiscal sustainability are growing. Markets are closely analyzing the potential tax changes proposed by both U.S. presidential candidates.

Looking at past U.S. elections, it is difficult to discern the impact of political change on the markets. A better strategy for investments' decision has been to focus on market fundamentals and economic variables. Nevertheless, volatility usually increases prior to the election date. This might be exacerbated by the future fiscal agenda. This scenario calls for a cautious investment strategy until there is clarity on the fiscal outlook, particularly with respect to corporate taxes.

01. Monetary pivot confirmed

The central banks' statements at Jackson Hole and the subsequent announcements of interest rate cuts have confirmed the shift in monetary policy. The pivot toward a global monetary policy easing is a relief for economic agents in a context of gradually deteriorating growth. The focus of concern is shifting from inflationary pressures to emerging signs of deterioration in the labor market. It is premature to describe the economic outlook as a soft landing in a context of persistent inflation in services and growing weakness in manufacturing sector.

The monetary pivot has been firmly established, as evidenced by recent central bank statements and the start of the easing cycle by the FED.

02. Fiscal consolidation pending

While monetary policy eases, fiscal policy continues to run high deficits across developed economies. This fiscal stimulus has been crucial in underpinning economic growth, particularly in the face of recent global challenges. However, concerns are mounting regarding the long-term sustainability of public accounts. The bond and equity markets are awaiting the candidates' fiscal policies proposals to assess their potential fiscal impact.

The chart also shows 10-year projections from the Congressional Budget Office (CBO). It suggests that if current spending and tax policies remain unchanged, the budget deficit will remain high over the next decade, which could lead to an extreme accumulation of public debt. The projections do not consider either presidential candidate's future fiscal plans.

03. Volatility increases with elections

The historical analysis of market behavior and the evolution of US election results does not allow for any major conclusions. For strategic positioning in asset allocation, it makes more sense to focus on the analysis of macroeconomic variables and risk premia than on the criteria of political change.

However, a certain seasonality is found in election years, due to an increase in volatility in the months leading up to the elections. From a tactical point of view, it is advisable to maintain moderate risk positions until potential changes in fiscal policy (corporate tax hikes) become clear.

The chart shows how stock market returns have been positive in every term except for three occasions marked by economic events.

Neutral positioning with balanced risks

The US elections will undoubtedly have high political and economic significance and as we approach the November 5th, market jitters are likely to increase. Polls and messages regarding potential new initiatives in regulation, energy policy, taxes and foreign affairs are likely to lead to significant gyrations in the share prices of the most sensitive sectors. This environment of increased volatility may be managed with appropriate diversification and a reinforcement of hedging and capital preservation strategies.

Investors face the last quarter of 2024 with a clearer outlook from a monetary standpoint, signs of moderation in global activity (but without entering recessionary dynamics for the time being) and a complex geopolitical and institutional environment. Eventual corrections caused by electoral uncertainty or geopolitical risk may represent windows of opportunity to broaden exposure to risk assets, given that the months following elections (see chart below with the performance after Trump and Biden's victories) are usually periods of stock market appreciation.

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