Source: Sichuan Reading Global Macro
Authors: Tao Chuan, Ge Xiaoyuan
The 2024 US election officially kicks off with the start of the Iowa primary election. This year's US election has attracted more attention globally than before. There are two main reasons: first, the decades-long struggle between the US parties over economic structure and wealth distribution will reach its climax; second, the possibility of a change of US political parties will increase significantly, which will also lead to a surge in policy uncertainty. Therefore, although the traditional view is that the general election will not have much impact on the market even if it is chaotic, we think this one will be different, and the last two general elections have left a new mark on the market, such as:
November market for US stocks: In the 2016 and 2020 elections, US stocks rose 4% and 11% in November, respectively (Figure 1). This was the first time since the 1980 election, and even after experiencing a rise in November, US stocks were able to record gains of more than 10% in the following three months.
Gold surges: Gold exploded in the 2016 and 2020 elections, with the biggest increases of 30% and 44% respectively, far exceeding non-election years (Figure 2). And even if you take a step back and look at it from a full-year perspective, the increase in gold was quite impressive: gold yielded 25% in 2020, “leading the way” among major asset classes, far exceeding the 18% increase in US stocks over the same period.
Potential “constitutional crisis”: The past two general elections can be described as “extremely anxious.” In 2016, Hillary won the electorate (65.85 million votes: 62.98 million votes), but ultimately lost to Trump by losing the Electoral College (232:306); in 2020, the mail-in ballot method gave Trump the lead, but in the end, the late but effective ballot directly rewrote the situation, causing Trump to refuse to acknowledge the election results, and voters stormed the Capitol. Currently, the two major candidates are “making a comeback,” and the approval ratings of the two sides are “between Hak-Zhong” (35% each). Any party winning the election could cause serious dissatisfaction on the other side, thus triggering another political chaos.
It can be seen from this that the general election has an important and unique impact on asset prices. With this presidential election in mind, we also need to focus our attention on presidential candidates and deduce how subsequent elections will be interpreted in three steps:
First, this is likely to be a “second battle” between Biden and Trump. Biden and former President Trump are still the “favorites” of their respective camps: through Figure 3-4, it is easy to see that the two sides are far ahead in their respective party approval ratings, and it is difficult to hope that the approval ratings of other candidates are comparable. Therefore, judging from the possibility of participating in the final “confrontation,” the Democrats will continue to choose Biden unless Biden has physical problems or the approval rating hits a new low. On the Republican side, if the other candidates are not gaining momentum, if they “abandon” Trump and cause him to run as a third-party candidate, this will reduce the probability that the Republican Party will win the election. This “gain outweighs the loss” outcome that the Republican Party clearly does not want to see.
Second, what are the requirements to win a general election? Historically, examples of breaking news and events before the general election directly changing voters' minds and election results are “not uncommon.”
However, among many factors, the economic recession can be described as a top priority, and the election results can be “fixed once and for all.” In 2020, for example, Trump lost the election because of the recession. Therefore, in 2024, if the economy can successfully achieve a “soft landing,” then there is a high probability that Biden will be re-elected. However, if it falls into recession before November, Trump's chances of winning the election will increase.
In addition to this, if the Russian-Ukrainian and Palestinian-Israeli conflict can be quickly resolved or significant results achieved before the general election, Biden is more likely to win the election. But if geopolitics gets bogged down and is then criticized globally, then Trump's chances of winning will increase.
Finally, how do the winners set their own economic and diplomatic agendas? From America's internal perspective, whichever party wins the election will benefit the domestic economy. Because historically, both Trump and Biden have adopted relatively active fiscal policies to stimulate the domestic economy (Figure 6), although their domestic focus is different.
From the perspective of the US from an external perspective, Biden chose to maintain his “circle of friends,” and Trump advocated “leaving the group.” If Biden is re-elected, the plurilateral strategy will continue: using existing alliances, mobilizing “like-minded” countries and excluding rivals such as China and Russia to facilitate deeper cooperation. And if Trump returns to office, he will relaunch the “get rid of the world” doctrine, strengthen the “America First” policy, and focus on nationalist foreign policy goals. At that time, Trump may reduce his dependence on China in a more aggressive manner (Figure 7).
Looking back at the election process and timeline, we recommend focusing on “Super Tuesday” in March, the final nominations of candidates from both parties in July-August, and the November presidential election (Figure 8). Let's take a closer look:
General election “trilogy”: Party primary election or party group meeting → party congress → final election. The beginning of the Iowa primary election means that the “first shot” of the general election has officially started. Although Trump had an absolute advantage in the primary election, the poll approval rating far surpassed that of second-place candidate Hailey. However, it is worth noting that Haley's philosophy is to support traditional Republican values and firmly oppose abortion, which has attracted her to the Republican establishment to gain a certain foundation. In the second primary state (New Hampshire), where the gap in approval ratings between Trump and Haley is already small (14%), if Haley can integrate 11% of the Reagan Republican vote, this will put some pressure on Trump's subsequent elections.
The next thing to focus on is “Super Tuesday,” March 5, when voters in more than a dozen states, including California, Texas, North Carolina, and Virginia, will vote. The reason why this day is important is because most of the candidates nominated by the party locked in the victory for the general election candidates ahead of schedule on this day, and market fluctuations are likely to increase further. For example, in 2020, although Sanders's approval rating was always higher than Biden's approval rating before “Super Tuesday,” the effects of Sanders' conversion of approval ratings to votes were limited. Eventually, Biden overtook Sanders as the final candidate nominated by the party. US stocks rose nearly 5% during the day.
The “outpost” of the final election was a debate in September, and the voting results were “officially announced” in November. In September, presidential candidates began making presentations, mutual debates, and moderator+voter questions based on certain topics. Debates usually cover various policy areas such as the economy, foreign policy, national security, health care, climate change, etc. The subject of the debate is determined in advance by the organizers and usually represents the voters' most important concerns. Finally, voters will cast their votes on November 5 to elect the next president.
The future will focus on swing state elections. Swing states are a “winning strategy” for US presidential candidates to win the general election. For example, in 2020, according to Figure 10, Trump lost the election mainly due to “defeat” in swing states. Therefore, if the big box positions of the eight key swing states (Pennsylvania, Wisconsin, Michigan, Arizona, Nevada, Georgia, North Carolina, and Florida) can still be consolidated in Biden's hands in the future, the probability of defeating Trump will also increase. Conversely, if Trump gains the lead, his chances of returning to office will increase, and market volatility will rise further.
Risk warning: Changes in the economic situation have exceeded expectations; US candidate results have exceeded expectations; the ripple effects of challenging Trump's candidacy, etc.
Editor/Somer