Why markets are fretting less about this US election

The equity market bears that have populated the US market for the past 18 months and been exposed for their judgment errors predicting sharemarkets have emerged from hibernation again in recent days, predicting a wild ride between now and the US election in November.

The bears (who have predicted the sharemarket will retreat) have been spectacularly wrong this year – red-faced as the major benchmark index, the S&P 500, and the tech-heavy Nasdaq have ground to record highs following the generative AI revolution and the prospects for interest rate cuts.

But the US election has presented the market pessimists an opportunity to retrieve their bona fides – because in this respect, history is on their side. Elections make for nervous markets because uncertainty is one of the sharemarket’s greatest enemies.

Among them is Morgan Stanley’s Mike Wilson, who told Bloomberg this week: “I think the chance of a 10 per cent [market] correction is highly likely sometime between now and the election,” adding that he believed the third quarter [of the calendar year] was “going to be choppy”.

Wilson leads a bunch of Wall Street experts questioning how much steam remains in the engine that is driving the market higher. But there are forces and countervailing forces pushing US markets over the next couple of months.

Chief among them is how the US Federal Reserve is viewing interest rates. This week, Fed chair Jerome Powell made particularly dovish remarks, adding weight to forecasts that the US will finally cut rates in September.

The timetable for rate cuts has been pushed back several times this year, but Powell’s remarks, in which he highlighted concerns of a weakening labour market, suggest those punting on a September cut could be on the money.

Data over the past week shows that in the US there have now been three straight months of rising unemployment.

If core inflation data due out on Thursday in the US show a continued slowdown in inflation, this should seal the deal.

Nothing excites the market bulls more than a fall in rates. Indeed, the anticipation of US interest rates cut has been a major driver of equities over the past year and a half.

Nothing excites the market bulls more than a fall in interest rates. Credit: AP

Whether the market will be less enthusiastic when the rates actually fall – when anticipation is replaced by reality – will be interesting.

The November election will inject some market uncertainty but maybe not as much as it has in the lead-up to previous elections.

In this instance, the markets know both candidates as sitting presidents. Plus, neither winner can remain in the job for more than one term.

Admittedly, there has been additional uncertainty since June 27 when President Joe Biden performed so poorly during the first presidential debate that some Democrats rumbled loudly about replacing him.

But his refusal to budge and the unwillingness of the party to destabilise has meant there is newfound certainty that he will contest the election against former president Donald Trump.

The difference this time is that the market has already had experience of what Trump will do on the economic front. And while the experts fear his xenophobic ‘made in America’ trade policies will ultimately damage the US and world economies, the near-term possibility of industry deregulation should boost equity markets – as it did when Trump won in 2016.

Ditto for Biden in 2020. When he came to power, the equity markets also took off even harder over the next couple of months.

In both cases, the skittish markets leading up to the election were overtaken by bulls once the victor had been called.

Earnings is the other force that will push markets over the coming months. The half-yearly reports will begin soon and will need to be healthy enough to support the strong share price growth that big tech stocks, in particular, have experienced.

US companies will have to deliver the biggest rise in profits in more than two years to avoid disappointing Wall Street analysts. That will be quite the challenge.

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