Among the subjects that could make people angry, we can obviously mention politics when opinions become divisive, threatening friendships and even families; sport sometimes when one’s favorite club (in my case Cagliari Calcio) loses stupidly 1-0 to Lecce having played 11 against 10 for half-time and having had plenty of chances, or when the rivalry between certain sports clubs (especially soccer) is beyond endearment (Inter-Juve, PSG-OM, Real-Barca or Servette-Sion); and finally taxes. The difference is that the latter generally creates more unanimity -against it- than it does division. As for me, I hate it when people talk to me about market seasonality.
So, I’d like to take this opportunity to point out that September is historically among the worst month for equities. For what it’s worth, the S&P500 has lost ground in each of the last 4 Septembers. And, according to a note of Deutsche Bank this morning, Bloomberg’s Global Bond Aggregate index is also down in each of the last… 7 Septembers! Now that your seatbelts are securely fastened, we’ve got 2 more subjects to talk about: politics and taxes. And it’s a perfect timing, because I came across an article this weekend that perfectly reflects my view when I am asked about the impact on the economy and markets of the outcome of the incoming US presidential election. It’s a text of David Bahnsen, called “Your Portfolio and the Election”, which was reproduced in this week-end John Mauldin’s “Thoughts from the Frontline” letter available here. It’s a quick read I recommend you too, but for the laziest ones here are the main quotes I will underline as they correspond perfectly to my own views and current thoughts:
- We are officially in that season when investors begin obsessing over the presidential election, joining the media’s excessive interest in something highly unlikely to have the impact they expect…Elections tend to be overrated.
- Politics has had the potential to be a divisive topic for decades. But objectively, it seems and feels worse now than it has in my lifetime. […] Sadly, a deep divide has taken hold, and I suspect we are years away from it improving.
- The idea that someone on Labor Day weekend believes they know the result over two months out is insane. The last two presidential elections were determined by less than 80,000 votes, combined, in just a few states, out of 150 million votes cast. […] an election that will most likely, once again, be settled by thin margins…
- It also is not true that investors would gain a significant edge in markets if they knew who the next president were going to be. [….] The bicameral nature of our legislature means that both the House of Representatives and the Senate are needed for legislation to pass.
- Here is a little secret: Markets have generally gone up under Republican presidents and markets have generally gone up under Democratic presidents, and the reason for that is… wait for it… markets just generally go up.
- Timing matters. Circumstances matter. Luck matters. The Fed matters. And yes, presidential policy matters. But you know what doesn’t seem to matter? Party affiliation.
- From tax policy to regulation to energy, the contrast between the two candidates is stark. Contrasts are easy to draw, even if the magnitude of impact is not.
- However, the one area where it is safe to assume things will not get immediately better with either candidate is government spending and the government debt that supports the spending. […] Peace time, war time, good economy, bad economy, health scare, no health scare—it is the most bipartisan thing in America: Government spending keeps growing.
- No one is running on Social Security solvency. No one is running on a balanced budget. No one is running on fiscal sanity.[…] This speaks to the reality of this election: There are some differences on various policy categories that matter (tax, regulation, trade, energy) if you assume certain things about both candidates; but when it comes to the most significant economic issue of our generation—the government debt level—there is nothing encouraging on the table.
- Markets and politics mix a lot less than we think, and they mix a lot differently than we expect. […] this election is not yet actionable when it comes to one’s portfolio positioning.
I hope readers will get the message: stop asking me about the economic and market impact of the US presidential elections, while preparing you for the worst – at some stage – as far debt sustainability or your taxes are concerned.
Economic Calendar
Welcome to September… historically among the worst month for stocks and neither a favorable one for bonds over the last few years (see above) if you care about seasonality. Like every beginning of the month, the macro agenda will be busy with the August US jobs report on Friday as the key highlight of this week, while US ISM and worldwide PMI indices will also provide an update on the growth trend. From central banks, there will be the Bank of Canada meeting on Wednesday.
After the disappointing July US jobs report released last month, followed then by the downward revision of more than 800k to total payrolls from April 2023 to March 2024, and finally Jerome Powell recent comments at Jackson Hole (“we don’t seek or welcome further labor market cooling”), the incoming US jobs report due Friday, the last before the next Fed’s meeting on September 18, will be key to assess the size of the first cut. The consensus expects payroll gains to pick up to +150k from +114k in July, with the unemployment rate ticking down to 4.2% from 4.3%, and average hourly earnings growth rebounding to +0.3% MoM (vs. +0.2% in July). In other words, August report should confirm that July bleak figures were mainly due to temporary negative distortions. In this context, the Fed will certainly proceed with a 25bps rate cut consistent with a soft-landing narrative and a gradual adjustment of its monetary policy, while another disappointing job report (payrolls gains under 100k, combined with a further increase in unemployment rate) will likely force Fed’s hand to be heavier. Before that we will get the JOLTS and ADP reports on Wednesday and Thursday, respectively.
As far as the business cycle is concerned, investors will be laser focused on the PMI indices that will be released across the world today (manufacturing) and Wednesday (services) to assess growth outlook for the next few months. Note however that both US PMI and ISM indices will be available the following days (Tuesday and Thursday) as US markets will be closed today for the Labor Day holiday. On top of the headline keep, investors will also keep an eye on the subcomponent’s indices such as new orders, employment and prices. Our US ISM manufacturing model forecasts a reading of 48.0 for August, in line with the consensus foreseeing a slight rebound from 46.8 in July. For the services industry in the US, but also in the rest of the world, the consensual prevailing view is a continuation of the current steady resilient expansion with gauges remaining (well) above 50 and potentially even surprising positively at the margin in some places. On Wednesday, the Bank of Canada (BoC) is expected to cut its target rate by -25bps (to 4.25%) for a 3rd straight meeting after June and July. Inflation fell to 2.5% in July (lowest reading since the spring 2021), while labor market is showing signs of persistent weakness. Finally, moving to our home country, other noticeable highlights include Switzerland August inflation and the Swiss Q2 GDP (tomorrow).
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