Feature – The US
Never underestimate the flexibility and dynamism of corporate America and the US economy.
Jack Janasiewicz, Natixis Investment Managers
are now defining investment winners and losers, in terms of sectors, and particularly in green energy.”
Although some of the pre-election fervour can be attributed to nothing more than political noise – albeit with the volume turned up to maximum – which may not necessarily shape the nature of the markets.
In addition, the positive US outlook, based on a soft landing, and the fundamentals in the economy suggest the country overcom- ing its recent difficulties. A point made by Raffaele Savi, head of systematic equity at Blackrock. “So far in 2023, equity markets have shrugged off banking stress, recession risk and monetary tightening in favour of a more optimistic view,” he says. So on this basis, if it was a road trip, the US economy has over- come some big bumps in the road, but now a clear route has opened up ahead. One like Route 66, clear and enjoyable. Janasiewicz concurs on such a scenario. “We remain in the soft landing camp based on our current economic outlook. This leads us to favour risk-on assets, preferring equities over bonds and the US relative to the rest of the world,” he says. One assessment says the soft landing scenario is already evi- dent in the data. Goldman Sachs suggests US equity cyclical stocks have outperformed defensive stocks by almost 12% across June, July and August. Goldman Sachs says the equity markets are, therefore, predicting 2% GDP growth this year as a result.
Hard to ignore
This is a source of debate. “The US economy continues to evolve,” Tomlinson says. “The next three to six months are hard to call.” But Tomlinson adds that from an institutional investor per- spective, especially with a long-term timeframe, it is difficult to ignore the US. “We have significant exposure to US equities. It is hard not to have a meaningful exposure to the US. If you don’t, you will be way off the benchmark.”
22 | portfolio institutional | October 2023 | Issue 127
There is no doubt that the US equity market is in a good place. But this is unlikely to last, says Aron Pataki, co-head of real re- turns at Newton Investment Management. “The US equity market could continue, but if history is a good guide, and I think it is, then returns are going to be subdued, poor in the medium term from here. Because interest rates are high and valuations are elevated,” he says.
This presents its own uncertain view for investors, without the added complexity created by the election and all its shenanigans. Janasiewicz says we can though highlight some observations in reference to US presidential elections from history about the shape of markets to come. “The first being that markets, from a seasonality perspective, tend to rally several months into the heart of the election campaign,” he says. Here Janasiewicz highlights that July through to September have historically been strong months for the stock market in election years, ultimately giving way to some weakness up un- til election day, and then finally resuming an upward trend. He also sees similar seasonal patterns in implied volatility for equity markets, with a notable uptick in volatility beginning in September and rising through election day and then finally seeing pressures abate into the end of the year. But given the unique and potentially divisive nature of the elec- tion ahead do historical precedents still stand?
Congress is king
Although another factor in not getting too carried away about the political situation impeding on the market is that presiden- tial elections tend to have a limited impact on the direction of the markets given that Congress ‘controls the purse strings,’ Janasiewicz says.
And he adds that again looking at historical return patterns, markets do best under a Democratic presidency accompanied by a split Congress while a Republican president with a split congress has less robust outcomes. “And while a Democratic-led Washington tends to see higher stock market returns, what matters most is the economic back- drop,” Janasiewicz says. “By far and away, earnings growth matters more so than the political landscape.” And as the mantra goes – once you give corporate America the rules by which they must play, they’ll figure out how to make money. “Never underestimate the flexibility and dyna- mism of corporate America and the US economy,” Janasie- wicz says.
Big checks
Another factor tending towards calm is that while the political climate in the US has become increasingly more polarized over the years, the system of checks and balances central to the
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