MARKET INSIGHTS

Weekly market commentary

10-Jun-2024
  • BlackRock

What we’re watching in 2024 elections

­Market take

Weekly video_20240610

Christian Olinger

Opening frame: What’s driving markets? Market take

Camera frame

Globally, over half the population is voting this year!

Voters are expressing frustration about many issues, but notably the rising cost of living. We don’t see incumbent leaders or challengers offering bold solutions – and high public debt somewhat ties their hands.

Title slide: What we’re watching in 2024 elections

1: U.S. fiscal deficit

The U.S. fiscal deficit is expected to remain historically large, with no major tax rises or spending cuts that could change this trajectory.

The deficit reinforces persistent inflation and bolsters our high-for-longer rate view. We see investors demanding more compensation for the risk of holding long-term U.S. bonds as a result.

2: Tracking policy changes

Trump’s more protectionist stance and Biden’s current protectionist policies may boost inflation pressures in any outcome.

Tighter immigration policies may be inflationary as the U.S. faces a shrinking working-age population. We remain focused on the U.S. Inflation Reduction Act and its incentives tied to the low-carbon transition. If Republicans control Congress, they may revise or repeal parts of the legislation to fund tax cuts.

Outro: Here’s our Market take

We stay overweight U.S. stocks for now and eye key policy areas of the presidential election. On a strategic horizon, we like government bonds in the euro area and UK over the U.S.

We are also tracking elections in India, Mexico, the European Union and the UK. For more details, read our weekly market commentary.

Closing frame: Read details: 

www.blackrock.com/weekly-commentary.

Election primer

We stay overweight U.S. stocks ahead of the election yet are cautious on bonds given the fiscal outlook. We focus on long-term positives in India and Mexico.

Market backdrop

U.S. stocks notched fresh highs last week and are up nearly 13% this year. The Bank of Canada and European Central Bank cut interest rates as most expected.

Week ahead

All eyes are on the Federal Reserve meeting this week. We see the Fed on hold in coming months even as other central banks start to trim policy rates.

Over half the world's population goes to the polls in 2024. We watch for investment implications. We think governments and candidates have limited solutions to key financial issues for voters. We stay overweight U.S. stocks before the U.S. election yet cautious on long-term U.S. Treasuries. No matter who wins, budget deficits are set to stay large. Elections in India and Mexico sparked market volatility, but we focus on long-term positives. A July UK election supports our UK gilts preference.

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Persistently large
Average U.S. fiscal deficit as a share of GDP, 1960-2034

The chart shows that the average U.S. fiscal deficit has expanded as a share of GDP over time, with projections staying persistently high over the next decade.

Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from the U.S. Congressional Budge Office, May 2024. Notes: The chart shows the average U.S. fiscal deficit as a share of GDP between 1960-1999, 2000-2019 and as projected for 2024-2034.

Global voters are expressing frustration about many issues but notably the rising cost of living. Yet we see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands. In November, U.S. President Joe Biden will face former President Donald Trump. Under both, pandemic borrowing swelled fiscal deficits – the shortfall in government revenue versus spending. No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits. See the chart. These deficits reinforce persistent inflation and our view that the Federal Reserve will need to keep rates high for longer. We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term U.S. bonds.

We track potential changes on U.S. trade, immigration and energy policy – and see a potential inflation boost no matter who wins. On trade, Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods. Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls. Major changes to legal immigration during a second Trump or Biden administration would have implications for inflation as the U.S. faces a shrinking working-age population. On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.

Elections around the globe

It’s already been a busy election year. In India, Prime Minister Narendra Modi secured a third term to lead the government but will need coalition support after failing to win a majority last week. That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalizing economy. Mexico’s election saw the ruling coalition score a resounding win that points to continuity. We see both India and Mexico benefiting from a rewiring of global supply chains. Though in Mexico, a new president and government rolling out broad reforms could weaken institutional checks and balances. Even as right-wing and populist parties performed well in the European Union elections, centrist parties are expected to keep overall control of the European Parliament. Yet the performance of governing parties will have repercussions, such as President Emmanuel Macron calling a snap election in France after his party suffered a big loss.

The UK votes in early July rather than in late 2024 as originally expected. A decisive victory for one party could create the political breathing space to address the UK’s structural issues, such as weak productivity growth. Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds.

Our bottom line

We stay overweight U.S. stocks for now and eye the key policy areas of the presidential election. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.

Market backdrop

U.S. stocks notched fresh highs last week and are up nearly 13% this year. The Bank of Canada and the European Central Bank both cut rates for the first time since the start of pandemic. Markets are focused on how far central banks can cut rates – and are now split on whether the Fed will cut once or twice this year after the strong U.S. payroll gains last week. We don’t see these rate cuts as the start of a cycle of multiple cuts given sticky inflation holding above central bank targets.

All eyes are on the Fed policy meeting this week. We expect key data – like last week’s U.S. payrolls and this week’s U.S. CPI – to drive Fed decision-making. Even with easing likely on the horizon for the Fed and already underway elsewhere, this is not your typical rate-cutting cycle, in our view. The red-hot U.S. payroll data reinforces what an unusual environment this is for the start of a global easing cycle. We don’t see central banks cutting far and fast.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while the German 10-year bund is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of June 6, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

June 11

UK payroll data

June 12

Fed policy decision; U.S. CPI; UK GDP

June 14

U.S. trade data; University of Michigan consumer sentiment survey

June 10-17

China total social financing

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons,
June 2024

  Reasons
Tactical  
U.S. equities Our macro view has us neutral at the benchmark level. But the AI theme and its potential to generate alpha – or above-benchmark returns – push us to be overweight overall.
Income in fixed income The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term U.S. Treasuries as we see two-way risks ahead.
Geographic granularity We favor getting granular by geography and like Japan stocks in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich.
Strategic  
Private credit We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk.
Fixed income granularity We prefer inflation-linked bonds as we see inflation closer to 3% on a strategic horizon. We also like short-term government bonds, and the UK stands out for long-term bonds.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like Mexico, India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook.

Note: Views are from a U.S. dollar perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Meet the Authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
Christian Olinger
Portfolio Strategist – BlackRock Investment Institute
Ann-Katrin Petersen
Chief Investment Strategist for Germany, Austria, Switzerland and Eastern Europe – BlackRock Investment Institute