The Stock Market Has Already Chosen a Winner in the 2024 Presidential Election

Economic

Political

Summary:

The U.S. stock market is a strong predictor of the incumbent party's success in presidential elections. Current data suggests President Biden has a 58.8% chance of reelection based on the Dow Jones' performance.

The U.S. stock market is one of the best predictors of whether the incumbent party will win a presidential election.

That’s important to know because of the widely mixed messages of the electronic prediction markets, to which many until now have turned to get reliable predictions. But many fans of those markets have become disillusioned by these mixed messages. For example, a survey of a handful of the best-known prediction markets earlier this week revealed that, depending on your focus, the probability that President Joe Biden will win reelection currently ranges from below 38% to a high of 76%. That’s so wide of a range that it’s difficult to place much weight on any of the predictions.

What about other economic, financial and sentiment indicators? To find out, I analyzed the U.S. stock market, the economy as measured by real GDP, the Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Survey. In each case, I focused on their year-to-date changes as of Election Day. Only one — the stock market — was significantly correlated with the incumbent party’s chance of winning (at the 95% confidence level that statisticians often use when deciding if a pattern is genuine).

What I found is summarized in the chart below. To construct it, I segregated all presidential elections since the Dow Jones Industrial Average DJIA was founded in 1896 into four equal-sized groups based on its year-to-date return on Election Day. As you can see, the probabilities of the incumbent party retaining the White House grow in lockstep with year-to-date performance.

The Stock Market Has Already Chosen a Winner in the 2024 Presidential Election _1

Based on the historical correlations and the Dow’s year-to-date price-only gain of 5.6%, Biden’s chances of winning reelection are 58.8%. Those odds will rise if the stock market gains more between now and Election Day, and fall if the market declines.

Even if the electronic prediction markets weren’t sending such mixed messages, it still would be hard to show that their track records are better than the stock market’s. That’s because, without a large sample, it’s very difficult for a pattern to meet traditional standards of statistical significance. The Iowa Electronic Markets (IEM), one of the oldest such markets, began in 1988, for example. So its track record encompasses just nine presidential elections.

James Carville, former President Bill Clinton’s strategist during the 1992 election, famously said “It’s the economy, stupid.” He used the line to remind Clinton’s campaign staff that all other issues pale in comparison to the economy as a determinant of whether the incumbent party retains the White House. Perhaps we should modify Carville’s line to “It’s the stock market, stupid.”

Source: Marketwatch

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Owen Li

Economic

Forex

Markets

US Treasury and German yields both ended a fairly quiet trading day a few basis points lower. Fed's Waller in a second speech yesterday said that he'd consider a rate cut at the end of the year (December) if the data warranted it. He added that policy was restrictive enough though, echoing comments made just a few hours earlier.

ECB's Lagarde in an interview aired yesterday sounded very confident of inflation returning to target. She stopped short of officially declaring price pressures under control. That's raising some eyebrows since her outspoken optimism comes just two days ahead of critical data. The Q1 wage growth numbers won't derail a June cut but it does offer a reason for cautiousness until the actual outcome is known.

Currency markets saw the two majors keeping each other pretty much in balance. EUR/USD hovered within a tight sideways trading range, eventually closing marginally lower at 1.0854. DXY's bottoming out process continued, advancing to 104.66. Sterling continues to trade (very) strong, both against USD (cable back > 1.27) and EUR. EUR/GBP lost for a fifth consecutive day to 0.854. Bank of England governor Bailey unveiled some of the central bank's future modus operandi.

It intends to replace the system of QE with repo operations to provide the financial system with liquidity. Doing so removes the interest rate risk which today is saddling up the central bank (and thus the UK government) with massive losses as it sheds low-coupon bonds in a higher interest rate environment. The switch may start in the second half of next year.

Sterling is soaring once again in the wake of consensus-beating CPI numbers that are nothing but a setback to the BoE eying a June cut amid hopes for a quick return to 2%. Headline (2.3% from 3.2%), core (3.9% from 4.2%) or services (5.9%, barely down from 6%) all topped estimates and push EUR/GBP to the lowest level since mid-March (0.8516).

In the FOMC May meeting minutes markets will be looking for some more context to a hawkish statement change saying that “In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective” combined with Powell ruling out a rate hike and the decision to taper QT (US Treasuries from a $60bn monthly pace to $25bn). The (market) debate about the (increased or not) level of the neutral rate is a lively one and probably again filtered through in the Fed discussions as well. We stick to the idea of core bond yields having found a bottom end of last week. Sideways consolidation is possible for the time being. EUR/USD shows no clear directional signs.

News & Views

The Reserve Bank of New Zealand kept its policy rate (OCR) stable at 5.5%, but updated projections provided a hawkish twist. Forecasts continue to err to an additional (final) rate hike as a next move with rate cuts now only expected to start by end 2025 rather than by mid-2025. That's a huge contrast with NZ money markets banking on a November rate cut. The RBNZ sees the OCR-rate at 3.75% instead of 3.5% by end 2026. In its policy statement, the RBNZ refers to slowly receding global services inflation and the delay in (Fed) rate cuts.

Domestically, higher dwelling rents, insurance costs, council rates and other domestic service price inflation are interfering with the disinflationary impact of weaker capacity pressures and an easing labour market. Compared to February, the RBNZ upwardly revised its inflation forecast with annual inflation now expected to enter the 1%-3% target range in Q4 2024 instead of Q3 and reaching the mid-point by mid-2026 instead of end 2025. Therefore, monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe. NZD swap rate rise by 4.5 bps (30-yr) to 9 bps (2-yr) this morning. NZD/USD spiked from 0.6090 to 0.6150 before settling around 0.6120.

The Chinese Chamber of Commerce to the EU warned that the chief expert at the Chinese Automotive Technology & Research Center called for a temporary increase of the tariff rate on imported cars with engines larger than 2.5 liters to 25%. China imported 250k such cars last year, accounting for around 1/3rd of all vehicle imports. The comments come after the US announced 100% tariffs on electric cars with Europe contemplating similar action by June 5. China last week also hinted at retaliatory levies on European wine and dairy products.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed's higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

Sterling Soars Once Again in the Wake of Consensus-Beating CPI_1

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed's Powell left the door open for rate cuts later this year. Soft US ISM's and weaker than expected payrolls supported markets' hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

Sterling Soars Once Again in the Wake of Consensus-Beating CPI_2

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

Sterling Soars Once Again in the Wake of Consensus-Beating CPI_3

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view but slower than expected April disinflation complicated matters. A June cut looks in line with the ECB looks improbable. Sterling extends a recent bull rally. A test of EUR/GBP's 2024 YtD low (0.8489) is possible. We expect this important support level to hold.

Sterling Soars Once Again in the Wake of Consensus-Beating CPI_4

Source: KBC Bank

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Thomas

Economic

Stocks

Earnings from semiconductor bellwether Nvidia on Wednesday are set to provide the latest test for a U.S. stock market rally that has taken indexes to record highs this year.

A 90% run in Nvidia's shares this year has made it the third-biggest U.S. company by market value, trailing only Microsoft and Apple.

Its influence on broader markets has also grown. Because Nvidia's chips are the gold standard in artificial intelligence, its results are widely seen as a barometer for the burgeoning AI industry, whose evolution has stoked investor enthusiasm and helped drive the bull run in U.S. stocks.

At the same time, Nvidia's growing weighting in indexes and exchange-traded funds has given its share price moves an outsized influence over broader markets. The stock now has a weighting of over 5% in the S&P 500, while accounting for 6.5% of the Nasdaq 100 and 20% of the VanEck Semiconductor ETF.

"If they do well ... there are going to be a lot of stocks that ride its coattails," said Jay Woods, chief global strategist at Freedom Capital Markets. "It's very rare you have one stock that can have such a dramatic impact on the overall market. But Nvidia has earned that."

Nvidia's results come as the S&P 500, Nasdaq Composite and Dow Jones Industrial Average have all notched record highs this month after a turbulent April, boosted by a strong earnings season and renewed hopes that the U.S. economy is headed for a so-called soft landing.

Robust earnings from Nvidia could complement well-received reports from other U.S. megacap companies such as Microsoft and Alphabet, helping justify stock market valuations that have grown stretched in recent months. The S&P 500 trades at 20.8 times forward earnings, compared with a historical average of 15.7, according to LSEG Datastream. Earnings from AI-Heavyweight Nvidia to Test US stocks' Record Run_1

Earnings from AI-Heavyweight Nvidia to Test US stocks' Record Run_1

Nvidia's presence in AI means "what they report can have a pretty significant bearing on a perception of the major investment theme that's out there right now," said Chuck Carlson, chief executive officer at Horizon Investment Services. AI is "touching every single area, and the nexus of all that is Nvidia," he said.

Nvidia's fiscal first-quarter results are due after the market closes on Wednesday. The earnings could impact the share prices of AI-related companies - some of which have stumbled in recent weeks after massive runs.

Super Micro Computer, Advanced Micro Devices, Arm Holdings and Palantir Technologies are among the stocks that sold off following their results this period. Those stocks all are off at least 20% from their 52-week highs.

Nvidia, by contrast, was recently about 2% from its all-time intraday high ahead of its report. The company's quarterly revenue is expected to roughly triple to $24.6 billion, according to LSEG.

"The bar is high," said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments. "Investors are being very demanding right now, and I don't see why Nvidia wouldn't have the same hurdle rates that these other companies have had." Earnings from AI-Heavyweight Nvidia to Test US stocks' Record Run_2

Earnings from AI-Heavyweight Nvidia to Test US stocks' Record Run_2

Big Swings

Nvidia's blockbuster results a year ago - when the company projected quarterly revenue more than 50% above Wall Street estimates - helped accelerate the market's excitement for all things AI. The company's stock rose 24% the following day.

This time around, bets in options markets imply an 8.6% move in Nvidia's shares in either direction by Friday, Trade Alert data showed. That would translate to a market cap swing of $200 billion - larger than the market capitalization for about 90% of S&P 500 companies.

To be sure, Nvidia's surging share price means the company must meet a high bar to support its stock. For example, some investors may be looking for the company to report particularly powerful revenue and project it to be robust going forward.

"As great and as sure as things seem right now for Nvidia, the revenues are still very volatile and I think fairly highly unpredictable," said Matt Benkendorf, chief investment officer at Vontobel Quality Growth.

However, Nvidia's valuation has moderated even as the shares have soared as analysts rapidly raised their expectations for the company's expected profit. The stock was recently trading at about 34 times forward 12 months earnings estimates, down from over 80 times in the middle of last year, according to LSEG Datastream.

"Unlike some of the AI-driven names ... it's actually been driven primarily by fundamentals,” said Deepon Nag, portfolio manager of large cap value strategy at ClearBridge Investments.

Source: Reuters

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Warren Takunda

Economic

Commodity

Japan recorded a trade deficit of 462.51 billion yen ($3 billion) in April as higher crude oil prices and a sharp drop in the yen boosted the value of imports, offsetting robust export growth, government data showed Wednesday.

Buoyed by continued strength in auto demand, exports rose for the fifth straight month, up 8.3 percent to 8.98 trillion yen, a record for April. Imports, meanwhile, also rose 8.3 percent, to 9.44 trillion yen, the largest ever for the month.

Major items boosting export growth were hybrid cars, semiconductor-making equipment and chips. Crude oil and aircraft were big contributors to the rise in imports.

The yen was 14.7 percent weaker against the U.S. dollar in the reporting month, when Japan was suspected to have intervened in the market to slow the currency's rapid decline.

A weak yen inflates import costs for resource-scarce Japan but boosts Japanese exporters' overseas earnings. Crude oil prices jumped 17.7 percent from a year earlier in yen terms, compared with a 2.6 percent increase in dollar terms.

U.S.-bound exports increased 8.8 percent to 1.80 trillion yen, extending its growth streak to 31 months.

The expansion underscores the resilience of the world's largest economy despite a spate of interest rate hikes by the Federal Reserve to curb demand and cool inflation.

Japan's trade surplus with the United States shrank 13.2 percent to 688.46 billion yen, down for the first time in 15 months. The decrease came after imports jumped 29.0 percent to 1.11 trillion yen, partly because of big ticket items like aircraft.

With another major trading partner China, Japan remained in the red for the 37th straight month with a 526.97 billion yen trade deficit, up 14.6 percent.

Imports rose 10.8 percent to 2.11 trillion yen, boosted by personal computers and smartphones. Exports increased 9.6 percent to 1.59 trillion yen amid strong demand for chip-making equipment and hybrid cars.

Japan's trade surplus with Asia including China expanded 2.8 percent to 305.84 billion yen. Its trade balance with the European Union came to a 123.20 billion yen deficit, expanding 68.0 percent.

Source: Kyodo News

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Alex

Economic

Stocks

The rebound in Chinese stocks is set to extend as the gains spread to segments that have trailed the market recovery.

The 29% surge in the MSCI China Index since a January low has pushed about half of its members above their 200-day moving averages, data compiled by Bloomberg show. That’s been a good omen in the past, with the proportion usually widening to 80% over the next few months.

The broadening of the rally will signal greater investor confidence in Chinese shares after cheap valuations and Beijing’s policy support helped push gauges higher. Separate analysis of China’s market cycles by HSBC Holdings Plc. and Goldman Sachs Group Inc. show that the gains may continue in the coming months.

China’s Improving Market Breadth Is Good News for Stock Bulls_1

“Comparing to the previous year, we have seen market breadth improvement, which is a good environment for bottom stock-picking focused on fundamentals across broad sectors,” said Wenchang Ma, a portfolio manager at Ninety One Hong Kong Ltd.

Consumer technology and financial firms have contributed the most to the MSCI China gauge’s recovery from a January low, while property and materials shares have risen more than 40%. There’s growing expectations for underperforming sectors such as equipment makers, exporters, technology and property to participate in the rebound.

“Small- and medium-cap stocks will benefit as the recovery spreads, given the improving macro credit risk profile along with an economic recovery,” said Chi Lo, a strategist at BNP Paribas Asset Management Asia Ltd. “Selective tech and property stocks could see good rebound as these sectors have been badly beaten down.”

Upside Opportunity

Previous advances of 30% in the Hang Seng China Enterprises Index within a five-month period were followed by a further gain in the gauge over the next four months with an average return of 25%, according to HSBC. That bodes well for investors looking to pick up shares even after equities have rallied.

Among buy-rated stocks that offer more than 30% upside include Air China Ltd., Alibaba Group Holding Ltd., China Mengniu Dairy Co. and China Tourism Group Duty Free Corp., HSBC strategists including Herald van der Linde and Prerna Garg wrote in a note dated May 20.

China’s Improving Market Breadth Is Good News for Stock Bulls_2

Some exporter stocks may also benefit from possible front-loading ahead of the US elections and positive policy support in their home market, said Raj Singh, a portfolio manager at Principal Asset Management based in Hong Kong.

To be clear, geopolitical tensions with US and key trading partner Europe remain a risk for Chinese equities. A clear upward trend for earnings, which largely underwhelmed in the first quarter, is also key to sustain the recovery.

Still, Wall Street brokerages are increasingly more bullish on China, with Goldman Sachs raising its 12-month target for some gauges due to falling risks, government support and historical evidence of additional returns after indexes enter a technical bull market.

The expansion of the equities rebound will “be an inflection point for Chinese growth and asset price recovery,” BNP’s Lo said.

Source：Bloomberg

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Kevin Du

Economic

Mid-tier firms in India's $254 billion information technology sector took market share from industry goliaths in recent quarters as clients curtailed discretionary spending amid inflationary pressures and economic uncertainty, analysts said.

Unlike their larger rivals such as Tata Consultancy Services and Infosys, mid-tier IT firms tend to focus on short-term deals aimed at helping clients cut costs rather than chase large-scale projects.

The practice has paid off in an environment of slowing demand in prominent markets such as North America and Europe.

LTIMindtree, Coforge, Mphasis and Persistent Systems are "increasingly viewed as challengers in (winning) Fortune 500 accounts, aiding the share gain process," Kotak Institutional Equities said.

The smaller companies could outperform their larger rivals further once discretionary spending improves, Kotak analysts Kawaljeet Saluja, Sathishkumar S and Vamshi Krishna said.

This should set the mid-tier IT firms up well as they try to win more budget-conscious clients in an economic backdrop where U.S. interest rates are expected to stay "higher for longer". Industry body Nasscom estimated overall revenue growth more than halved to 3.8% last financial year.

"In the current macro environment, clients are increasingly looking at service providers (that) deliver services at lower and predictable costs with better business outcomes," said Avinash Baliga, partner at consulting firm Avasant.

Persistent Systems CEO Sandeep Kalra and Mphasis CFO Manish Dugar confirmed the market share gains. India's larger IT firms did not respond to Reuters' requests seeking comment.

"We are able to hold our own and win against the larger piers as clients are looking for competency and not scale," Dugar told Reuters.

The market share of India's top five IT firms fell 17 basis points in 2023, reflecting the inroads made by the mid-tier IT firms, according to BNP Paribas data shared exclusively with Reuters. However, the top five IT firms still owned 88.35% of the market as of December 2023 among the top 10 firms.

On the stock market, share prices of Mphasis and Persistent Systems advanced 23.7% and 42.5% respectively in the last 12 months compared to a 16% gain in the broader Nifty IT Index.

In April, Infosys forecast fiscal 2025 revenue growth between 1% and 3% in constant currency terms, while most analysts had expected it to be at least in the range of 2% to 5%.

"Due to the sheer size they have reached, larger players have given muted guidance," said Ashok Soota, founder of mid-tier IT firm Happiest Minds Technologies , which also gained market share. "We need to be humble about this as (our) market share is (relatively) small on the grand total."

Source: Reuters

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Warren Takunda

Economic

Forex

The Pound to Euro exchange rate powered to its highest level since March at 1.1736 after UK inflation fell to 2.3% year-on-year in March, a figure that was higher than the market and the Bank of England were expecting (2.1%).

The all-important and much-watched services inflation component of the release was notably hotter than expected at 5.9%, whereas the market and Bank of England were expecting a reading of 5.5%.

The odds of an interest rate cut at the Bank of England in June are now materially lower than 50%, having been close to 60% just days earlier. The rise in the value of the Pound reflects this readjustment in expectations for Bank of England policy.

The Pound rose against all its peers in the G10 in the wake of the release, with the Pound to Dollar exchange rate hitting 1.2745, its highest level since March 21.

Those who read Pound Sterling Live's recent article covering the views of Andrew Sentance that warned of an upside shock will have been prepared for the eventuality of an upside surprise. "My forecast for core inflation and services inflation were broadly correct. I forecast core inflation at 3.8% - the actual figure was 3.9%. My forecast for services was 6% vs 5.9% actual. Measures of underlying inflation have turned out much higher than market consensus," says Sentance following the release.

The outcome meanwhile lowers the tail risk for the Pound of a brace of back-to-back rate cuts in the summer. "Does the Central Bank cut in June, or take advantage of the fact inflation came in a touch higher than expected and hold off until its August meeting? Movements in currency markets this morning suggest an August cut just became a little more likely," says Nicholas Hyett, Investment Manager at Wealth Club.

"UK inflation at 2.3% now undershooting the G20 average - which it will for the rest of the summer - but the symbolism of being above 2% will delay some of the more shrill political calls for cuts for a month or two," says Simon French, an economist at Panmure Gordon.

He explains that services inflation at 5.9% is the most consequential aspect of the report as it proves non-tradeable components are proving more sticky than hoped.

"We will stick to August for the first rate cut - although another round of wages and prices data to come before June MPC," says French.

Pound Sterling Jumps against Euro, Dollar After UK Inflation Beats Expectations_1

Above: GBP has hit new multi-week highs against the Dollar and Euro.

"Today’s release was a bit of a blow for the BoE and the Prime Minister," says Paul Dales, Chief UK Economist at Capital Economics. "Even though there is still a wages and a CPI release to go before the BoE meeting on 20th June, it feels as though a cut then now seems very unlikely. Even a cut in August is looking a bit more doubtful."

Looking at the details, it was the fall in household energy bills in April that provided the most significant downward impulse in inflation. Falling food prices also weighed. There were also notable falls in the inflation rate of clothing and footwear and alcoholic beverages.

Pound Sterling Jumps against Euro, Dollar After UK Inflation Beats Expectations_2

Image courtesy of the BRC.

As the above chart shows, service-oriented industries such as restaurants and hotels continue to push prices higher. This will reflect the heavy wage costs such industries face and emphasises inflation will only return to the 2.0% target on a sustainable basis if wages cool.