Are markets ready for a Harris presidency?

Market Recap

• Equity markets mostly rallied this week on the eve of the Federal Reserve easing cycle, which is widely expected to begin on September 18.

• The S&P 500 jumped 4%, led by strong gains in technology, consumer discretionary and telecom services, while banks and energy lagged.

• Meantime, the TSX rose 3.5% to a record high and is now up a snappy 12.5% in 2024. Materials and technology led, while energy lagged.

U.S. election

Our impression of last week’s debate between former President Donald Trump and Vice President Kamala Harris mirrored the general viewer consensus—it was a good night for Harris.¹ Unlike Trump’s debate with President Joe Biden, which saw Trump on the offensive, this time around the Republican candidate seemed pre-occupied with less-relevant issues while Harris was able to get most of her major points across. Fact-checking by the host broadcaster, ABC, also didn’t appear to help Trump’s case. While Harris appears to be narrowly leading in most polls,² that doesn’t necessarily translate into the electoral college, where Trump may have an advantage. Regardless, the race is very close. The day after the debate, markets did quite well, indicating that uncertainties around the Democratic ticket are in the past and perhaps even that Harris offers some appeal to investors as the candidate perceived to be more predictable. We still expect an uptick in volatility in the lead-up to election day, especially as managers begin to rotate their portfolios based on their predictions, or get a little more defensive if it’s unclear who will win. September is also traditionally a volatile time for markets, hence the term “September Effect,” which refers to its track record as the worst month of the year for equity returns.³ While the ride could be a bit bumpy for the next few months, we think markets are well-positioned for another rally in Q4.

Bottom Line: The presidential race remains close and an uptick in election-related volatility is likely, but markets do not appear to be overly nervous about it, which is a positive sign.

Inflation

The most recent U.S. Consumer Price Index (CPI) data, which was released last week, showed year-over-year inflation continuing to fade while core CPI ticked up slightly over the previous month.⁴ This cemented our expectation that the U.S. Federal Reserve (Fed) will cut interest rates by 25 basis points (bps) at this week’s meeting; the year-over year data justifies a cut, and a 50-bps decrease would make it look like the Fed waited too long to act. But do the latest numbers affect the rate outlook beyond September? The Fed continues to remind us that they’re “data-dependent,” which gives them the wiggle room to pause the rate cut schedule for a month if, for instance, inflation creeps upward two or three months in a row. That said, we expect rate cuts to continue to be the story for the remainder of the year—the big question is whether a 50-bps cut is on the table at some point. If it does happen, our expectation is that it would be at the Fed’s meeting in early November (there is no meeting in October); by that point, the presidential election (and election-related volatility) will be in the rear view. It should be noted, however, that a 50-bps cut is far from certain.

Bottom Line: As inflation continues to ease, we still expect three or four rate cuts from the Fed before the end of the year.

Europe

The latest news out of China is that Beijing is considering lowering interest rates to provide relief for mortgage holders and prop up the country’s property market, which has been a drag on the broader Chinese economy for months. This represents an acknowledgment of what many observers have been saying for some time: the Chinese economy is at a relative standstill compared to the world economy, and some form of additional stimulus is necessary to get it moving again. Other measures may also be in consideration, including converting unoccupied buildings into low-cost housing for individuals, which would require the support of local governments. This could help reduce the outstanding supply and help property developers improve their balance sheets. The hope is that they’ve reached an inflation point and the worst is behind them. That said, there are years’ worth of already-built housing inventory available, and that backlog will take a while to clear even if activity returns to the market. Any steps that Beijing takes now are unlikely to solve the problem overnight, though they may help. In the longer run, consumer confidence will need to return, and people will have to get back to spending in order for the Chinese economy to fully bounce back. So far, China’s response post-COVID has been quite the opposite of North America’s response, where there was a big surge in spending based on pent-up demand and untapped savings.

Bottom Line: While the European economy remains in limbo, European equity markets have done relatively well, and we continue to prefer them over Canada.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Riding the tailwinds of September storms.