October 28, 2024  |  4 MIN READ

Weekly Market Update

Holding the Wheel Steady Ahead of US Election

What happened last week?

The S&P 500 and Dow shed -0.96% and -2.68%, respectively, to snap a six-week winning streak while the Nasdaq ticked up by 0.16%.

Existing home sales remained muted as buyers struggled with elevated prices, a limited inventory, and high mortgage rates. Meanwhile, initial jobless claims returned to pre-hurricane levels.

bulb icon What does this mean for investors?

We would suggest avoiding getting caught up in a mere “moment” of volatility as markets attempt to absorb critical policy implications in the US. We should, however, be prepared to act when the dust settles. This is particularly the case if markets price in views that seem misaligned with reality.

3 Things to Know

Citi’s CIO Keeps Global Equities O/W Ahead of US Vote

We believed that any further “gaming” of election outcomes for portfolio allocations would be unwise at this point. For many reasons, our current weightings have been skewed to expect US outperformance.

Powered of late by a strong tech sector recovery, EPS growth has been faster in the US equity market than in other large regions.

While EM Asia — a region we slightly overweight — anticipates double-digit EPS gains this year, Europe is expecting a 3.6% regional EPS gain, Latin America just +1.8%. This compares to a 10% gain for the US with 29% for US large cap tech shares.

The outperformance of US equities in not at the mere start. The 15 years of outperformance over non-US equities since 2009 roughly matches the longest stretch in history.

This does not by itself suggest a negative outright performance. We see no other market close in size where innovation is generating such large and rapidly growing profits. But this is of course reflected in the price investors pay for US shares.

Even the equal weight S&P 500 has returned 34% over the past year, a gain that is nearly nine percentage points stronger than non-US shares (we’ve held the equal weight S&P 500 overweight since August 2023).

Optimistically, our updated economic forecast — before major US policy changes are considered — suggests a broadening of profit gains across regions and industries globally.

China’s strengthening action to battle deflation could be a helpful catalyst in 2025. If the US doesn’t take strong fiscal actions to stimulate demand, US interest rates could stay on an easing track allowing global easing to proceed in line with the actions taken by key central banks this year.

But if the US does stimulate demand while restricting foreign supplies, it could in turn challenge the dovish narrative.

This brings us to the issue of where we might look for equity returns outside the US. In general, we would hope to add exposure highly selectively by industry, across the world’s best firms regardless of domicile.

Regionally, however, we believe Asia stands out for having markets with growth, value and positive historical performance when US rate/FX pressures ease.

A large, concentrated positioning China’s recovery is not necessary to take a more positive view. Shares across Emerging Markets and Developed Markets Asia — including a more richly priced India — trade at about 15X this year’s profits, with EPS expected to rise at a double-digit pace in both 2024 and 2025.

Regional shares could also benefit from new changes to China’s economic policy to address the aftermath of a burst property bubble and industrial deflation.

But Taxes, Tariffs May Alter FX, Interest Rate Outlook

No one can be certain whether candidate Harris or candidate Trump will win or how strongly their Congressional mandate will be expressed by US voters on November 5.

The former is campaigning on tax and spending increases, the latter on tax cuts and tariff increases. If any party “sweeps” it is more likely to be “Republican Red” than “Democrat Blue” as nearly three times as many Senate Democrats face election this year than Republicans.

Prediction markets have moved in favor of former President Trump in the past month. Yet polling data for both the nation and in “swing states” are less conclusive. We believe neither of these sources can be fully trusted as results are within the statistical margin of error.

See our weekly CIO Strategy Bulletin for more details