Markets abhor a vacuum and uncertainty. U.S. politics provide both.
One of our hedge fund managers told us this week that, in his career, he has never seen so much election-related trading this far before an election. It is a sentiment heard from most of RiskBridge fund partners, citing “Republican sweep baskets” and “Democratic sweep baskets,” referring to groups of stocks that benefit depending on which party controls the White House, Senate, and House of Representatives.
The leading narrative is that a Trump presidency would mean more growth, more inflation, higher yields, and a steeper U.S. Treasury (UST) curve. Proposed tariffs would add price pressure at a time when the issue of inflation has perhaps not been dealt with. Fiscal stimulus through tax cuts could also be inflationary, keeping budget deficits elevated and the U.S. Treasury debt supply higher than expected.
Another debt ceiling debate will be immediately on the heels of the November election. The most recent debt ceiling agreement, reached two years ago after weeks of severe uncertainty, suspended the debt limit until January 2025. This will need to be renegotiated.
In our view, inflation and jobs data will fill the vacuum created by U.S. politics. We have six more inflation prints and five more nonfarm payroll reports between now and the end of the year. With CPI and the jobs market cooling, futures are now pricing in three 25 basis point cuts from the Fed by year-end (up from just one in April).
We think the 10-year Treasury yield will continue to trade in a tight range of 4.0% – 4.4%. In our view, rates offer reasonable insurance for potential risk-off events. RiskBridge continues to favor credit over rates.
Source: Strategas Research Partners, May 2024
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