DIARY OF A PORTFOLIO MANAGER
OCTOBER 29, 2024
“I try to laugh about it
Cover it all up with lies
I try to laugh about it
Hiding the tears in my eyes
'Cause boys don't cry
Boys don't cry”
- Boy’s Don’t Cry, The Cure
Good day all,
Will a certain candidate be crying on November 6th after we see some results? We will find out but, in the meantime, let’s look at what happened the past couple of elections…
Reviewing Post-U.S. Election Returns for 2016 & 2020
In a recent analysis, J.P. Morgan reviewed asset class returns following the 2016 (Republican/Trump) and 2020 (Democrat/Biden) presidential elections.
Though these returns are interesting to review, it’s worth noting that market responses to the upcoming November 5th, 2024, election could diverge significantly from these past episodes. For one, a Republican win was seen as an unlikely outcome in 2016, which affected pre-election market pricing, contrasting with the odds factored into 2020 and 2024.
Moreover, the post-election returns below represent a sample size of one for each party, where macroeconomic conditions were notably different than they are today. For example, performance following Trump’s election was partly driven by the Fed beginning to raise rates from their ultra-low levels post-GFC amid stronger economic data and rising inflation expectations. Then following Biden’s election in 2020, markets were also influenced by the ongoing effects of pandemic-era stimulus, accommodative policy, and positive vaccine developments. Today, we largely consider ourselves to be in a post-pandemic phase, where more central banks are starting to cut rates after significant tightening over the past few years.
In addition, there are differences between the platforms that each party is running on this time around, even if the candidate has remained the same. There is also significant uncertainty about the policies the candidate who wins on November 5th will attempt and be able to implement as President, partially determined by whether their party also controls Congress.
2016
Before the election, it seemed clear that Hillary Clinton would win and, if not, the markets would tumble under Trump. From election day to Dec 31, the S&P 500 was up 5% (not bad for less than 2 months). Financial's were up 16.7% being the best performer and the worst was consumer staples down 1.2%. of the 12 sectors in the S&P, 10 were up in this time frame.
2020
It was not really clear who was going to win in 2020 but we determined that the worst case scenario was not knowing who won right away. That’s what happened for almost a week. Yet, from election day to Nov 30, the S&P 500 was up 9.4% and to Dec 31, was up 13.5%. 11 of 12 sectors were up to year end with only utilities down 1.5%.
What’s the take away? Even with 100% foresight, you would have made the wrong decision and left a lot of money on the table.
Earnings Season Well Underway
North American equity markets continue to push to record highs, bolstered by a promising start to the U.S. third-quarter earnings season. The results from major banks signal a healthy U.S. consumer, with spending supported by a resilient labor market, despite some softness among lower-income households. Historically, periods of declining interest rates – especially amid a “soft landing” scenario where the economy continues to grow – create favorable conditions for investment returns. We have been looking at the potential for a more meaningful divergence in the path of interest rates in Canada and the U.S., with implications for the Canadian dollar.
Canada’s inflation report for September was released recently and it decelerated more than expected. The overall Consumer Price Index (CPI) dipping below the Bank of Canada’s (BoC) 2% target for the first time since early 2021. Falling gasoline prices contributed to much of the decline, so the “core” inflation measure, which removes more volatile categories such as energy and food, held steady above 2%. This is why you need to read past the headlines. Meanwhile, housing-related categories remained the largest contributors to inflation, but mortgage interest costs and rent pressures also continued to recede from high levels. Also encouraging, the breadth of inflation narrowed further towards pre-pandemic norms, suggesting that an increasing amount of every-day goods and services are seeing less intense pricing pressures.
In recent months, the Bank of Canada has telegraphed a shift in its priorities. More specifically, it is increasingly turning its attention to ways it can better support economic growth given the declines witnessed to date with inflation. It has already cut its policy rate three times since the summer. Moreover, given recent inflation figures, markets now expect the Bank of Canada to approach its interest rate policy more aggressively. The consensus view is the Bank will cut interest rates by half a percent when it meets within the next week. And some economists, including at our firm, expect Canadian policymakers to remain aggressive heading into the end of the year and into next year. Meanwhile, U.S. economic indicators continue to be sturdier, as evidenced by the most recent retail sales figure released over the past week that suggests the consumer remains healthy. While the U.S. Federal Reserve has also started to cut interest rates and is expected to continue to do so, there may be less of a case for the kind of aggressive approach that is expected from the Bank of Canada. At some point next year, there is the potential that interest rates in Canada could sit meaningfully below interest rates in the U.S.
Interest rate differentials – the difference between short-term interest rates between countries - often influence currency flows, as funds gravitate towards higher-yielding currencies, strengthening their value relative to lower-yielding ones. In recent weeks, this trend has propelled the U.S. dollar higher against other major currencies, including the Canadian dollar. The Canadian dollar could experience further downside if the interest rate divergence between the U.S. and Canada widens, as some are predicting.
We are mindful of the risks of further downside to the Canadian dollar should interest rates meaningfully diverge. But we also see the potential over the next few years for lower interest rates to stabilize and improve the growth outlook in Canada by providing some relief to consumers and businesses. After all, the Canadian economy is sensitive to interest rates, and arguably more so than the United States. For now, we continue to view our U.S. dollar exposure in our clients’ portfolios as offering important diversification and protection in today’s environment.
Have yourself a great week ahead,
