Stocks are plunging. The Nasdaq 100 entered correction territory. Unemployment is on the rise. And now, investor excitement about Federal Reserve rate cuts in September is being tempered by growing concern about the overall health of the US economy.
The calm and contentment of this latest bull run started to crack on Jul 24, when the S&P 500 posted a drop of 2 per cent or more for the first time in 17 months. Now, after the biggest two-day selloff since March 2023, the anxiety has ratcheted up significantly, as the Fed faces criticism that it waited too long to cut and weak earnings batter the technology companies that were driving the rally.
Throw in geopolitical tension and a chaotic US election that appears to be a toss-up between Donald Trump and Kamala Harris, and there’s plenty for retail investors to fret over in the final five months of 2024.
We asked four investment experts what investors need to know about key issues in the market as they position their portfolios for the months ahead. Here’s what they said:
Seema Shah, chief global strategist, Principal Asset Management
Rate cuts: Historically, the start of rate cuts tends to be bad for stocks. However, we have to be careful to not keep looking to history, as it can be somewhat misleading given the different backdrop. Typically, the Fed would be cutting into a recession, with inflation falling and mass job layoffs. That’s likely a very different environment to what we have now.
Provided the Fed cuts in September and can achieve a soft landing, equities can continue to do well. But if the cuts come too late and that opens the door to an economic slowdown, equities could struggle.
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Tech: Undoubtedly the market is concentrated and it’s very vulnerable to a pullback in tech. When we look at tech, I don’t think it’s dependent on the macro environment – of course it is to some extent but those companies have strong liquidity and high quality, and they’re at the forefront of growth and productivity not just for the US but the globe as well.
I think there are pockets around the market where you want to be looking that still have that catchup trade. That’s why the small cap trade is doing well at this moment in time.
The election: If there is a Republican victory, one part of the market that should do well is small caps – domestic companies that stand to benefit from trade tariffs. The part of the market that stands to lose the most, meanwhile, is multinationals, which have the greatest revenue exposure outside the US.
We’re also looking at what bond yields will do. Say a new administration comes in and makes announcements for tax cuts. The market is going to respond with a bump up in bond yields. But there’s not anywhere near as much fiscal space as there was in 2016. The chances of them really expanding with spending is more constrained.
Moreover, higher trade tariffs and and greater fiscal stimulus would be inflationary. And if both houses of Congress and the presidency go to the Republicans, I would expect bond yields to rise as they price in more inflation from a lack of fiscal discipline.
If there is a Democratic victory, the market might not be as positive in the immediate reaction, but from a fiscal standpoint, bond yields would be relatively lower. There would be less concerns about what the government would do in spending. You could have lower yields, which could give a boost to equities. The Fed might also be able to cut rates more. If you have a mixed government (one party controls House and one party controls the Senate), that means they can’t go forward with spending plans, so there is probably less volatility.
Emily Roland, co-chief investment strategist, John Hancock Investment Management
Rate cuts: The Fed has all the rationale in place to go ahead and start cutting. Equity markets are reacting in a “bad news is good news” fashion – weaker economic data revives hopes the Fed can cut, but the bond market is really not pricing it in yet. One of the things complicating markets right now is that you have the narrative of Fed cuts on one side and the Trump trade on the other side, and they’re almost opposites.
The economic data are showing cracks but not big cracks. It’s sort of the perfect soft landing scenario, and markets are pricing that in. The challenge is there may come a point when bad news is actually bad news. From an investment perspective, there is a significant opportunity right now to lean into bonds, because they’re not pricing in all the cuts yet.
Tech: Some of the weakness in tech is just a function of the fact that there was a lot priced in prior to earnings season. People are making these analogies to the late 1990s, but the earnings are there. The earnings are far outstripping the earnings of other sectors in the market. Fundamentally, there is nothing wrong with the tech space. The price just got ahead of itself.
The election: I think too much has been made about the influence of potential political configurations on markets. Both of these administrations are going to be inheriting a slowing growth environment. Either administration is going to continue expanding the size of the deficit. There’s this idea of more tariffs, which investors are seeing as inflationary, but I don’t see it. There wasn’t inflation the last time we imposed tariffs on China.
A lot of the so-called Trump trade has just been priced in already. It’s a similar playbook to what we saw in 2016. We would fade that trade – we’re underweight small caps because of our preference for higher quality. Plus, the earnings just aren’t there.
You could see some of the trade unwind and a return to the focus on fundamentals if the odds shift to a Democratic candidate.
All of this trade is based on the assumption there is a Republican sweep, so if there isn’t, a lot of these policies won’t see the light of day. There’s too much focus on this narrative and not enough focus on what is fundamentally happening right now.
Anthony Roth, chief investment officer, Wilmington Trust Investment Advisors
Rate cuts: Our view is that we’re in a strongly disinflationary economy, that the Fed’s 2 per cent target is very achievable, and that the rate of inflation will come down to 2-2.25 per cent by the end of 2025. We think this will transpire without the economy going into a contraction and that we’ll have an economic cycle where the trough will be positive economic growth, which is unusual.
We just increased our overweight in small-cap stocks. As interest rates come down, it makes it much more attractive for smaller companies to finance their businesses again, and small caps are much more levered to their financing than large-cap companies are.
Tech: We believe it’s very important to never underweight big tech. You have to take the lumps as they correct because over long periods of time they’re going to perform strongly. We’re overweight large caps and that overweight is equally divided between the seven companies that have driven the rally in the S&P 500 and the other 493. We’re seeing financials, discretionary – lots of different areas, and particularly in quality companies – start to catch up.
The election: If Democrats win, expect more of the same. That could be quite problematic in terms of continued, very expansive, deficit spending and excessive federal debt, with the associated servicing burden, which arguably is spilling over into long-term Treasury markets.
With a Republican win, there are lots of policies being discussed that, if you thought about them in a purely theoretical sense, could be very damaging to the good outlook we see for the economy. We could see across-the-board tariffs, along with highly restrictive immigration policy, and in the labour market, all the new supply is coming from immigration. We could see Republicans cutting taxes further and causing debt to get even more out of hand.
What we don’t know is whether or not these policies will be implemented in a doctrinal way or in a more nuanced way that’s not damaging to the economy and still achieves some of the political and geopolitical goals driving them in the first place.
If a Trump administration were to limit immigration on the illegal side but widen it on the legal side for people coming into the country and providing skilled labour, that would be very beneficial. And we could have tariffs across the board, but with lots of exceptions so that the exceptions are more the rule.
Marko Papic, chief strategist, BCA Research
Rate cuts: I ended my longs on the S&P 500 on Jul 2 after two years and see two risks afoot over the next few months. One risk is that growth decelerates far more than Fed cuts would be able to help with. Growth deceleration is what the bull market needs, but if it tips over into too much deceleration, then Fed cuts aren’t sufficient to arrest a recession.
The second risk is that we actually aren’t going to have a recession, but political volatility causes bond yields to remain elevated – and it’s bond yields coming down that allows you a soft landing.
Tech: Big tech and artificial intelligence (AI) are blowing out all sorts of historical tops. No one really knows how AI will be monetised, but I’m pretty sure it won’t be through big tech. What has big tech given us because of all the chips bought from Nvidia Corp? The proof is in the pudding, and a lot of the pudding now is hype.
You’re basically buying legacy stocks to buy an AI revolution and it isn’t clear the revolution will help incumbents, except through partnerships and other things. If mega caps tumble, it would cause carnage, given they’re almost everything people seem to own.
The election: If we have a divided Congress, that suggests that a President Trump – an economic populist targeting US nominal GDP growth if there’s ever been one – would be constrained. As such, I think markets will largely ignore politics and focus on macro fundamentals (such as a recession or no recession call).
If there’s a “GOP sweep”, President Trump’s pro-growth policies would face no constraints. Why should investors fear pro-growth policies? It’s not clear we need more growth – or inflation – now. In 2016-2017, the US economy needed them. That’s why the bond selloff back then didn’t bother the equity market.
Even a mild bond selloff now, in the context of slowing growth, may not be welcomed by equity markets. Note how equities performed at the end of 2023, when we got to 5 per cent on the 10-year bond. Why would it be different in 2024, if yields started going “the wrong way” again?
It’s almost certain a Democratic “hold” in the White House wouldn’t produce a “hold” in the Senate, where Democrats are going uphill. That’s another divided government scenario. The investment impact would be “meh”. Investors should stick to macro fundamentals and ignore politics if there’s a divided White House and Congress. BLOOMBERG
