Ed Mills, Managing Director, Washington Policy Analyst
The 25th anniversary of the collapse of Long Term Capital Management ushered in a transformative period of unconventional monetary policy.
Pandemic-era policies induced a sharp increase in the money supply, thus provoking inflation’s revival.
Central banks have raised interest rates in response, but inflation is not yet vanquished, reflected in financial asset pricing.
If price pressures diminish, as economic activity subsides, bond yields should fall. But if inflation remains “sticky” the stock market may yet prove the best hedge.
The 2024 election is well underway and signs currently point to a 2020 ballot rematch between President Biden and former President Trump. An analysis of the dwindling number of competitive swing states shows just a handful likely to decide the outcome of the election—once again a potential repeat of 2020. The battle for majority control of the House and Senate is also showing signs of a close election, reflecting the slim majority in each house—likely decided on macro factors such as the winner of the presidential election, candidate quality, redistricting lawsuits, the economy, and views on the direction of the country. Control of both chambers of Congress remains important to the market, with tax cuts scheduled to sunset in 2025 and decisions on key judicial and regulatory confirmations awaiting the respective House and Senate majorities after the 2024 election. There are many wildcards ahead and we have lived through multiple elections where the conventional wisdom is upended more often than many of us would like to be reminded. In this update, we outline some of the market implications of the 2024 election and whether certain historical markers can give us insight into who might have the edge.
State of the presidential race
At this stage in the race, President Biden is the expected Democratic nominee. On the Republican side, former President Trump has a sizable lead over his challengers for the Republican nomination. An analysis of voter preferences in previous nominating contests shows candidates with sizable leads at this point in the nomination process have all eventually captured their Party’s nomination, making former President Trump the favourite to represent the Republican Party in 2024. More than a year out from Election Day, we generally look at the approval ratings of incumbent presidents and polling on “right track/wrong track” of the country as a proxy for their strength and/or vulnerabilities for re-election. For President Biden, there are some warning signs for his re-election, as he has a net negative approval rating and a majority of voters viewing the US as on the “wrong track.” On the other hand, all incumbent presidents in the last 80 years have been re-elected, unless there is a recession. This could make the trajectory of the economy over the next year particularly important for the re-election of President Biden. Other Democratic primary candidates have entered the race, but their candidacies do not pose a material threat to Biden’s path to the Democratic nomination at this stage.
Concerns around Biden’s age have opened questions about what would happen if he had to drop out of the race. While an early withdrawal would see the Democratic National Committee (DNC) select a new nominee, a late-stage withdrawal would result in legal uncertainties around what electors can do. If Biden withdraws, a large field of both nationally prominent and rising star candidates are waiting in the wings. As mentioned, we view former President Trump as the most likely Republican nominee, as the increasingly crowded Republican primary field is not yet presenting a real challenger to the former President’s significant lead in the polls. The outcome of various legal challenges for President Trump could alter the race, but we are in unprecedented times as it relates to these trials. As stated above, the approval rating of an incumbent president can be a proxy for the outcome of the general election and was a warning sign in 2020 for President Trump. There are a limited number of times where a former president has sought to win a second non-consecutive term and former President Trump also has a net negative approval rating similar to President Biden.
Race for the house and senate
There are 34 of the 100 Senate seats on the ballot in 2024, with Democrats defending 23 and Republicans 11. Among the most competitive seats, all are currently held by a Democrat, including seats in Montana, Ohio, and West Virginia—all states won by President Trump in the last two presidential elections. The current 51-49 Democratic majority would flip if Republicans net two seats or one seat and win the residency (as the Vice President is a tiebreaker). Candidate quality, which has been an issue in recent senate races, will loom large in several of these, but with Senate races closely aligning with the residential reference of the state, Republicans have an edge.
A third-party run could further disrupt the playing field, acting as a ’spoiler’ factor that could sap votes from the mainstream candidates and potentially swing the election
In the House, where all 435 seats are on the ballot, Democrats would have to flip six seats to win a majority. Historical precedent may provide tailwinds to Democrats, given that over the past 40 years, the House’ majority party (currently Republican) has lost an average of three House seats in presidential election years. At this point, the most important factors pertaining to the House are the ongoing court challenges to congressional maps, potentially switching several safe Republican seats over toward Democratic seats.
What to watch and potential wildcards
The state of the race will continue to be fluid until the election, but key factors in the coming months will shape the race’s trajectory. As the 2024 cycle progresses, the primary debates will offer a key look into whether a challenger to former President Trump can emerge. Economic factors in the coming months will also play a critical role in determining the headwinds Biden faces, given that only four presidents have lost their second-term re-election bid in the last 80 years and all of them experienced recessions/lower consumer confidence during their first term.
Broader trends to watch include candidate quality in the race for the Senate, given Republican losses in close races (particularly in 2014 and 2022) by nominating candidates in key swing states with limited general election appeal. A third-party run could further disrupt the playing field, acting as a ’spoiler’ factor that could sap votes from the mainstream candidates and potentially swing the election. Historical precedent has not seen third-party candidates receive electoral college votes on a material scale since 1968, but some polling data does confirm a potential lack of enthusiasm among Democratic voters for Biden. A growing number of voters with preferences for outside candidacies or issue-specific platforms could gravitate to a third-party candidate.
Key market issues for investors to watch will include headline risk around the appropriations
process in Washington and the impacts of a potential government shutdown.
As the electoral cycle progresses, other key market issues for investors to watch will include headline risk around the appropriations process in DC and the impacts of a potential government shutdown. As the divided Congress continues to debate funding levels and spending priorities for the 2024 fiscal year, we expect to see brinkmanship around the finer details, but view any funding impasse resulting from a shutdown as unlikely to have material near-term market impacts. However, potential dysfunction may impact voter sentiment down the line, with specific impacts on the Congressional race depending on how a potential shutdown unfolds.
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