This week in the markets: America decides

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In a famously busy year for elections, no vote will be more consequential than this week’s US Presidential face-off between Donald Trump and Kamala Harris.

Too close to call

In the final days before Tuesday’s election, the only certainty about this year’s Presidential election is that it is too close to call. The so-called Trump trade, which has seen the dollar and bond yields rise in anticipation of more inflationary policies from the Republican candidate, has eased back in the final days of the campaign as the Democratic vice-president has brought the contest back to a knife-edge decision.

What’s less clear is the extent to which it will matter which party wins this week. There are as many similarities as differences between the two candidates’ economic and fiscal policies. And history shows that markets have tended to perform similarly whatever the colour of the Presidency. The total return for the US market under Presidents Obama and Trump, for example, was more or less identical despite their very different world views.

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At the sector level too, the outcome is often the opposite of what you might expect. Donald Trump’s support for traditional energy and dislike of technology stocks was a feature of the 2016 campaign but tech outperformed energy easily in his first term. Meanwhile Joe Biden promoted clean energy and other environmental issues in 2020 but developments elsewhere in the world (Ukraine) gave traditional energy a boost during his Presidency.

Perhaps more important than who wins is the influence of the Presidential election cycle. Markets tend to do better in the last two years of the four-year cycle than in the first two, for political rather than economic reasons. That strikes a cautious note with the US stock market at an all-time high, with historically high valuations and in the face of an apparent slow-down in earnings growth on the horizon.

Changing of the guard in emerging markets

Valuations are a key driver of stock markets and nowhere is this more evident than in emerging markets today. Nowhere have valuations risen faster than in the Indian stock market, where the multiple of share prices to earnings has come to match that in the popular US market as Indian shares have tripled in value since the pandemic low in March 2020.

That upwards trajectory looked to hit a nasty air pocket in October as the two main indices in India, the Nifty 50 and Sensex, both fell by around 6% as foreign investors withdrew $10bn from shares, the biggest drawdown since the start of the pandemic.

Investors are worried that valuations have become too frothy in the face of recent data showing a slowdown in consumer demand. In particular, a glut of IPOs this year has seen companies pushing for ever-higher valuations, which are testing even bullish domestic investors’ appetite for shares. At the same time, new stimulus in China has shifted the investment focus back to the out of favour and much cheaper Chinese stock market.

Budgeting for change

Meanwhile here in the UK, investors spent the second half of last week weighing up the likely market impact of the new Labour government’s very old Labour tax, spend and borrow autumn Budget. Initially welcomed by investors, the bond market quickly changed its mind about the government’s ambitious spending plans and the impact that they would have on public sector borrowing and whether or not they would provide the growth impetus new Chancellor Rachel Reeves is counting on. The conclusion is that after a short-term sugar rush, growth may be lower for longer than hoped for. And bond investors fret that this might see the government coming back for more in terms of yet higher taxes and more borrowing.

For investors, the Budget actually turned out a bit better than feared. Although pensions have been dragged into the inheritance tax net, and despite well-trailed hits to investors with capital gains, second home buyers, farmers and AIM stock investors, the big concerns around pensions - higher rate tax relief and tax-free lump sums - were left untouched.

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Central banks back in focus

Once the politics is out of the way this week, attention will immediately re-focus on the big driver of financial markets in recent years - monetary policy. On both sides of the Atlantic, we are due interest-rate decisions this Thursday. And in both cases, rates are expected to fall by a quarter point. What’s less clear is where rates head next. On both sides of the pond, expectations of a market-friendly rate-cutting cycle have been tempered in recent weeks.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.