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Former President Donald Trump will return to the US White House for the next four years and, with the Republican party also taking the Senate and possibly the House, a “red sweep” is the most likely outcome. Financial markets reacted by extending popular “Trump trades” – pushing up bond yields, the US dollar and equity futures – as investors assign higher odds of Trump turning policy proposals into reality. The inflation impact of Trump’s policies will pose risks to fixed income investments, and these could be amplified by concerns about US fiscal sustainability.
The move up in bond yields, US stocks (record highs in October), and Europe indicate markets' perception of a perfect scenario centered around strong US growth and falling inflation and a positive impetus from monetary easing in Europe. Although we acknowledge the resilience of the US, not all data in the US and Europe has been straightforward.
The broad outlines of the candidates' respective platforms are coming into focus, though they still lack clarity on costs related to specific proposals. Most importantly, it will not be clear until after the elections which policies will be implemented - beyond the election rhetoric - or whether Congress will agree to enact them. Here, we evaluate the candidates' platforms and their potential effects on the US economy.
A recent report in Europe shows the region's productivity and investment gap with the United States is widening, and a similar trend is emerging in connection to China. The risk of Europe becoming irrelevant is escalating, particularly in light of advancements in the digital economy and artificial intelligence (AI). In the US, the Fed gave strong forward guidance on rates, which is in contrast to its recent approach of staying data dependent on inflation. This, coupled with some concerns on growth, led us to lower our terminal rate expectations. Its 50bp cut underscores the Fed's willingness to pivot after the recent labor market softening and diminishing upside risks to inflation. We expect further 50bp cuts by year-end.
Third-quarter returns were strong. Performance of BBs and Bs was fueled by falling government bond yields as the major central banks’ swings to more accommodative policies were offset by mildly widening spreads. The big performance surprise was the extremely strong performance of CCCs and the Distressed index.
Capital markets whipsawed between a weakening US labor market and hopes that the Fed would successfully steer the economy towards a soft landing. Markets are optimistically interpreting the latest policy action, which could potentially boost consumption and investment. We now believe the Fed will ease policy by another 50 bps this year (75 bps previously expected), split equally between its two remaining meetings.
The US Federal Reserve will begin its easing cycle this month, capping a remarkable period of restrictive monetary policy that has not been experienced since the early 1980s. The tighter policy stance has helped cool inflation and moderate economic activity. Now, the Fed hopes to ease off the policy brake in a way that preserves continued disinflationary progress towards its long-term 2% inflation target while also supporting their second mandate of "maximum employment". In this note, we highlight the uniqueness of this monetary policy cycle, how financial markets are anticipating significantly more policy easing than seen in recent easing cycles, and the financial market implications.
A series of weak US data in July questioned the market narrative of a soft landing and brought back fears of recession. The rise in the July unemployment rate to 4.3% (latest reading in August is 4.2%) triggered a significant market concern about a possible weaker-than-expected US labor market, raising the risk of an impending recession. We do expect a significant slowdown of the US economy, but not a recession. We expect a significant deceleration in the next few quarters, consistent with a broader weakening of many labor market indicators.
Passive strategies have generally have fared well over the past decade, which has made it easy to forget the long periods during which active managers outpaced passive approaches. The reasons we believe market concentration will decline include (1) a shrinking earnings advantage for the top ten companies, and (2) seemingly unsustainably high valuations. We believe investors may benefit from investing with active managers that thoughtfully select their exposure based on the earnings and valuation profile of each stock.
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