What investors need to know

Biden or Trump? One of the events of the year is undoubtedly the US elections in November. What will be the possible impact on portfolios? This is the question he answers Norman Villamin, Group Chief Strategist, and Peter Kinsella, Global Head of Forex Strategy at Union Bancaire Privee (UBP).

In the years of the US presidential elections – explains Villamin – the yields investment trends have been favorable for both stocks and credit, outside of the years of recession. This is consistent with our optimism on both asset class given the current context of economic expansion.

Possible rally in November

In the years in which voting took place after the Second World War, “only on three occasions the S&P 500 has delivered negative returns (1960, 2000, and 2008). For bond investors, during US presidential election years the nature of the inflation regime appears to be key to understanding the trajectory of 10-year US Treasury yields. Since World War II, during non-recessionary periods credit spreads have contracted in all presidential election years except 1948 and 1956, and even then spreads only widened by year-end 11-12 basis points compared to the beginning of the year”.

But 2025 could bring uncertainty

Therefore, “since there are no clear signs of recession yet, credit spreads are narrowing and the S&P 500 has already risen by almost 15% since the beginning of the yearhistory suggests that equity and credit investors should continue to benefit from election-related tailwinds, which will support returns ahead of the November elections.”

However, with the Fed still grappling with persistent inflation as during the Great Inflation, “bond investors should seek to moderate their exposure to interest rate volatility and instead focus on carry or high-income strategies to drive total returns from bond portfolios.

With the likelihood that, in view of the November elections, the Biden administration continues to support economic activity through fiscal and monetary tools, we expect the historical tailwinds in equity and credit markets to remain supportive for investors over the summer.”

Biden or Trump?

Furthermore, “with the Biden administration which is already showing signs of wanting to replicate the strategies of Obama’s 2012 campaign to recover from weak polls and popularity, the final six months before November 2024 could replicate the nearly 12% rally in the S&P 500 that occurred from May 2012 to just before Obama’s victory in November 2012.

During this period, the investors positioned for an earnings-led stock rally, they can simultaneously begin building positions to hedge against the uncertainties that will accumulate in 2025, regardless of who the new occupant of the White House will be.”

In fact, the tax challenges that await whoever wins in November 2024 make 2025 more economic and investment uncertainty than this year. We expect the fiscal uncertainty from a new presidential administration to come with economic and geopolitical costs that would favor gold.

Indeed, despite “a more resilient economic environment in Western countries and a ‘higher for longer’ rate regime in the US, gold’s 12% year-to-date return has outpaced non-US global equities and nearly kept pace with US equity returns in mid-June. More surprising to many investors will be the fact that gold has outperformed global equities in the pandemic/post-pandemic era (2020 to mid-June 2024) and that over the past two decades of economic and geopolitical uncertainty, gold’s 9.4% annual return has outpaced global equities’ 6.5% annual return. We expect gold to continue to offer similar qualities in an environment of political uncertainty well beyond 2025.”

Inflation unknown

That there be a second term for the current administration Biden or for the former Trump administration, which is expected to maintain the deglobalization foreign policy implemented since 2017, the consequences of a dovish Biden administration seeking re-election combined with the fiscal challenges that the new administration will face could lead investors to face renewed volatility in interest rates and inflation in the coming years.

Nonetheless, inflation linked bonds U.S. inflation is expected to be lower over the next five years only during the deflationary period of 2008-2020. As a result, Treasury Inflation-Protected Securities (TIPS) offer investors asymmetric protection against the prospect of more sustained or volatile inflation in the coming years, which could accompany the ongoing reshaping of the global economic and political landscape.

Possible scenarios

Overall, although the panorama that awaits us remains articulated, The run-up to the November elections should continue to offer investors attractive risk-reward opportunities in both equity and credit, with politicians in office who are increasingly seeking to appease an anxious electorate.

However – concludes the expert – “investors should simultaneously start preparing their portfolios for the more uncertain and riskier environment that could emerge in 2025, where the tailwinds of fiscal support could falter and volatility in interest rates and inflation could once again pose a challenge to equity and bond investors”-