Super Tuesday is almost upon us, a pivotal moment in the political calendar of the United States, as it is the day in which the greatest number of US states hold their primary elections and caucuses. These votes will determine which candidates are put forward as presidential nominations from their respective parties and, given that they are one third of all delegates, it is a strong indicator of which candidates will be put forward for election come November this year.
Even at this early stage, strong bookie favourites have emerged, with the favourites being Donald Trump and Joe Biden (the latter will likely walk it based on the convention that the incumbent president tends to be unopposed by their party). Despite his popularity, Donald Trump is a wild card in this situation. His ongoing legal issues have made him ineligible from some ballots, although that hasn’t stopped republican voters from effectively signalling their support for Trump. In the Nevada vote, the majority of voters placed their ‘X’ next to ‘none of the candidates’, as Trump’s name was not on that ballot. Trump’s only real competition is Nikki Haley. However, she only commands around 40% support from Republican voters, making her unlikely to win the ballot (as current voting stands though, Trump himself was a dark horse in his first nomination).
Calling elections is a difficult thing, and there is also much more to US politics than who sits in The White House but, nonetheless, it is a pivotal moment for the country, with Trump seemingly having a grip on the soul of the Republican party. Neither candidate is a spring chicken but Joe Biden, who may become the oldest presidential nominee in US history, is likely to face an uphill battle despite overseeing a strong recovery in the US economy. In theory one would have expected Joe Biden to be a shoo-in for the next presidency, given the economic success of America and his largely gaff-free presidency (now that the Hunter Biden case seems to have lost all momentum), but given the current pulse of America, nothing seems certain.
Rather than speculate on the outcome of Super Tuesday or the election in general, we can observe academic research around historic US equity market performance. In a 2019 paper by Lubos Pastor and Pietro Veronesi, of the National Bureau of Economic Research, they note that from 1927 to 2015, the US stock market has performed better under Democratic presidents than Republicans, with Democrats generating an average excess market return of 10.7% per share, versus -0.2% for the Republicans. This may be counterintuitive for some, as the Republicans position themselves as being business friendly, but the researchers also note that GDP growth has been faster under democratic presidents. Their research builds on previous work, which has also supported the notion that democratic presidents are better for stock markets. While not decided by Super Tuesday, when it comes to Congress, the market has performed best when Congress has been split.
Outside of purely academic research, professional investment managers have also been voicing their opinions around the outlook for the US in an election year. In that regard, we sat down with Fran Radano, the manager of North American Income Trust (NAIT), at the end of last year. Rather than place the fortunes of this trust on the outcome of US election, he looked past it to the economic reality of the United States, as well as the performance of US value stocks (a natural style bias of NAIT given its income mandate).
Fran thinks that the US economy has entered a phase that will see a tight labour market, which is helpful for consumer-facing stocks in the near term. He also notes that despite tighter credit conditions and greatly reduced household savings, the chances of a soft landing versus a mild recession are becoming more balanced as inflation subsides; with the US recently posting an inflation rate of 2.4%. Fran and his team are generally positive on the outlook for the US, although he applies a degree of caution when investing, as his conversations with companies have shown signs of a pull back in some US sectors, with the COVID boom seemingly having run its source and bank lending also becoming more restrictive. Fran also has concerns around US debt levels and the viability of overly indebted (and as a result lower quality) companies who will likely need to refinance at higher interest rates.
Note that none of Fran’s comments are direct judgments on the outcome of the elections, but rather on the general health of the US economy. In what may become a very charged and polarising election, it might be best to remind investors of the benefits of a longer-term bottom-up approach and looking through the noise. Political tides ebb and flow but there is merit in focusing on company specific issues and how these individual companies will perform in the context of the broader US economy. Despite Super Tuesday and the election coming over the horizon, 2023 and the start of 2024 have seen strong performance from US equity markets, which have benefited from a surge of interest in AI in a way other regions haven’t. Inflation may have been higher than expected at home but, with its recent inflation print, the US Federal Reserve (which operates independently from Capitol Hill) may have greater reason to cut interest rates this year. This may end up being far more important for US markets than the election.