Today’s debate is not going to move the needle as neither Donald Trump nor Kamala Harris came out as a clear winner, says Vasu Menon, managing director, investment strategy at OCBC. The two US presidential nominees faced off in their first debate on the morning of Sept 11, Singapore time.
Instead, how the economy performs in the coming weeks, especially jobs data, and what they each say at their campaign trail in the run-up to Nov 5, will decide the final outcome, says Menon in a Sept 11 note.
“Harris comes through with better policies for the middle class while Trump has positioned himself as the strong leader America needs to stand up to countries that have taken it for granted,” adds Menon. “The question is: Will Americans vote based on policies or rhetoric? The jury is still out, and investors will be left guessing, and that only means more market volatility in the run up to the US elections in November.”
According to Menon, a Trump victory may cause the US Federal Reserve to pause rate cuts if it fuels inflation expectations, given his policies on tariffs, immigration and tax cuts.
Tax cuts may give markets a boost in the short term but the inflation it fuels may be negative for markets eventually, he adds.
Meanwhile, a Harris win will mean policy continuity, less uncertainty and will probably allow the Fed to cut rates further in 2025, says Menon. “However, if she succeeds in pushing through the tax hikes she’s proposed, it may not be welcomed by markets.”
See also: Taylor Swift endorses Harris for US president after debate
Today’s debate focused on Trump and Harris, but in reality, the US election goes beyond just two of them, notes Menon. “Much depends also on which party wins the elections in the Senate and House of Representatives. The outcome in Congress will also impact the ability of either candidate to carry out the policies they have promised.”
Menon concludes: “The only certainty at this juncture is that markets are headed for a period of greater volatility in the coming weeks in the run up to the US elections.”
Pop superstar Taylor Swift announced her endorsement of Harris after the debate wrapped up, potentially bolstering the current vice-president’s support among younger and female voters.
See also: Trump says ‘too late’ for debate after Harris pitches CNN forum
Calling herself a “Childless Cat Lady”, a term used by Trump’s running mate, JD Vance, to disparage women without children, Swift announced her support in an Instagram post featuring a photo of her posing with a cat in her arms.
Swift’s Instagram caption reads: “Like many of you, I watched the debate tonight. If you haven’t already, now is a great time to do your research on the issues at hand and the stances these candidates take on the topics that matter to you the most. As a voter, I make sure to watch and read everything I can about their proposed policies and plans for this country.”
Swift backed President Joe Biden and Harris 2020. She adds: “Recently I was made aware that [an] AI of ‘me’ falsely endorsing Donald Trump’s presidential run was posted to his site. It really conjured up my fears around AI, and the dangers of spreading misinformation. It brought me to the conclusion that I need to be very transparent about my actual plans for this election as a voter. The simplest way to combat misinformation is with the truth.”
What should investors do?
All in, there is still a case for investors to stay invested and remain “medium-term positive”, says Menon, assuming the US economy sees a soft landing or, at worst, a shallow and short recession.
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“History shows that eventually it’s the economy and earnings that will determine the market outlook more so than politics. It’s in the interest of neither candidate to cause a deep recession and it's also not up to them either, because the US political system is robust,” he adds.
According to Menon, the odds of an economic contraction are now much lower compared to last year, as the Fed seems ready to respond to any threats with deeper rate cuts if necessary. “Fed Chairman Jerome Powell has signalled recently that the US central bank is keeping a close watch of the labour market and is prepared to act forcefully if necessary. This, along with the abundance of investment liquidity on the sidelines, with US money market funds at a record high of US$6.3 trillion, could offer some backstop for markets.”
Although equity markets have rallied sharply since the start of 2023, valuations are generally not excessive, especially for non-tech stocks, which have not done as well as their counterparts in the tech sector, adds Menon. “Lower interest rates also support higher price-to-earnings (PE) multiples, so Fed rate cuts should support equity markets provided we do not see an economic or earnings recession in the US.”
Nevertheless, at this stage in the market cycle where investors continue to face a confluence of uncertainties, it is important to stay diversified across asset classes and over time, he says. “Volatility is two-sided — it represents risk but can also offer opportunities on sharp market pullbacks. However, don’t get carried away and be too eager to jump headlong into markets to bargain hunt aggressively on dips. Take a measured approach, buy gradually and spread your investments over the next six to nine months lest we see more rounds of market volatility and intermittent sharp pullbacks.”