NEW YORK, March 8 (Reuters) - Investors fixated on
earnings and monetary policy are starting to factor in another
variable that could sway markets this year: the 2024 U.S.
presidential election.
In his State of the Union address on Thursday, U.S.
President Joe Biden proposed raising corporate taxes, whereas
his opponent, Republican candidate Donald Trump, signed a 2017
law that slashed taxes on companies and the wealthy. Biden also
boasted of U.S. economic progress under his tenure.
It is difficult to gauge how asset prices could be swayed by
these proposals and whatever else the presidential candidates
may put on the table in coming months. The winner is likely to
face a narrowly divided Congress that would make it difficult to
push through legislative changes.
That has not stopped some strategists from assessing how the
political outlook could coalesce with other factors that have
been driving markets. These include excitement over the business
potential of artificial intelligence and shifting expectations
of how soon the Federal Reserve might ease monetary policy. The
S&P 500 index is up about 7.4% year-to-date and stands
near a record high.
"You get a sense (investors) ... have a lot on their plates
right now, and politics is starting to come into that," said
Paul Christopher, head of global market strategy at Wells Fargo
Investment Institute. "Even though everyone knows the
candidates, it's going to be a pretty close race so it's very
difficult to predict the outcome."
Opinion polls show Biden, 81, and Trump, 77, closely
matched. While the U.S. economy is performing better than most
high-income countries, Americans overall give Trump better marks
in polls for economic issues.
Biden on Thursday proposed to increase to 21% a 15%
corporate minimum tax on companies reporting over $1 billion in
profit that he won as part of 2022 clean energy legislation.
He also promised to renew his "billionaire tax" proposal,
which would impose a 25% minimum tax on income for Americans
with assets of more than $100 million.
However, "it's going to be difficult for any tax policy
proposal to pass by either side because it's going to come down
to party lines," said Larry Tentarelli, chief technical
strategist for Blue Chip Daily Trend Report.
Regardless of the election outcome, fiscal policy will
likely be among the first items that the next administration
tackles, Wells Fargo analysts wrote.
A Republican sweep would likely mean that the 2017 tax cuts
would be extended at the cost of higher inflation, while a
Democratic sweep would lead to higher taxes on higher-income
households and corporations, the firm noted.
ELECTION YEAR TRENDS
The S&P 500 has notched an average gain of 15.5% in years
that a president has sought re-election, CFRA data going back to
the end of World War II showed. That compares to an overall
average annual return of 12.8% in that period.
At the same time, election years come with their share of
volatility. Analysts at BofA Global Research noted earlier this
month that, in previous election years, the Cboe Volatility
Index has risen by an average of 25% from the second
quarter to November.
Volatility tends to fall after election day with uncertainty
removed, the firm said. The bank recently increased its target
on the S&P 500 to 5,400, from 5000.
October futures on the Cboe Volatility Index -
which encompass options contracts that extend until the middle
of the following month - were recently trading some 2.6 points
higher than the September futures, suggesting investor wariness
regarding election-related market swings.
Historical trends may favor Biden as well. Since the
emergence of Super Tuesday in 1976, year-to-date gains in the
S&P 500 ahead of the primary have coincided with the president's
political party winning the election 80% of the time, LPL
Financial data showed.
The firm noted, however, that the S&P 500 has lately been
rising along with Trump's standing in national polls.
"This economy is doing well - and we will see whether Biden
gets credit for it," said Jeff Buchbinder, chief equity
strategist for LPL Financial.
EYES ON CPI
The market also had to digest plenty of near-term economic
data to gauge the Fed's monetary policy trajectory.
U.S. job growth accelerated in February, Labor Department
data showed Friday, but a rise in the unemployment rate and
moderation in wage gains kept on the table an anticipated rate
cut in June.
Investors are also awaiting U.S. consumer price data on
March 12 for further clarity on whether inflation has eased
enough for policymakers to lower borrowing costs in coming
months.
"Continued normalization in wages coupled with a weak CPI
print next week could increase the FOMC's confidence that
inflation is on track to returning to target, potentially moving
forward the prospects of rate cuts," wrote Jeff Schulze, head of
economic and market strategy at ClearBridge Investments.