MARKET INSIGHTS

Weekly market commentary

Sep 23, 2024

Policy focus sharpens in U.S. election

­Market take

Weekly video_20240923

Catherine Kress

Opening frame: What’s driving markets? Market take

Camera frame

In the race between U.S. Vice President Kamala Harris and former President Donald Trump, we stay focused on policy areas such as tax, energy, trade and regulation.

Control of Congress will be key to determining the next president’s ability to carry out their agenda.

Title slide: Policy focus sharpens in U.S. election

1: Different approaches to fiscal policy

Harris has largely adopted President Joe Biden’s tax plans, including higher corporate taxes. She has set out some differences, such as on the capital gains tax.

Trump plans to fully extend the Tax Cuts and Jobs Act expiring in 2025 and introduce new cuts, including to corporate taxes.

Neither party has prioritized tackling the budget deficit.

2: Energy and trade key focuses

U.S. oil and gas production is at record levels.

A Harris presidency would see a continuation of current energy policies, [including] support for clean energy.

Under Trump, Republicans would look to boost energy production and scale back implementation of the Inflation Reduction Act. Yet we think it’s unlikely the act would be repealed entirely.

On trade policy, Harris is likely to maintain the status quo, with the potential for additional targeted tariffs against China. Trump’s proposed 60% tariffs on China and 10 to 20% broad tariffs would be a major escalation.

Both candidates are likely to pursue additional export controls on national security grounds, especially focused on advanced technology.

3: The outlook for regulation

Big tech may still be a target for bipartisan antitrust measures.

A Harris win could change the healthcare landscape, with expanded Medicare or drug price caps.

Outro: Here’s our Market take

Policy differences between Harris and Trump are becoming sharper.

We see potential impacts in sectors like energy, tech, healthcare and financials.

Closing frame: Read details: blackrock.com/weekly-commentary

Policy implications

The U.S. election outlook is coming into focus with election day just weeks out. We assess the impact of likely policy differences on the economy and sectors.

Market backdrop

U.S. stocks hit new highs last week after the Federal Reserve’s hefty rate cut. We think the Fed’s mixed messages after the decision could stoke future volatility.

Week ahead

We watch U.S. core PCE data for August out this week. We think inflation will prove sticky and could surprise the Fed again as it did earlier in the year.

The U.S. presidential election has undergone a reset in recent months, with Vice President Kamala Harris replacing President Joe Biden atop the Democratic ticket. Most national and battleground state polls are showing a close race between Harris and former President Donald Trump. Policy differences are becoming sharper – yet control of Congress will be key for implementation. We stay focused on areas such as tax, energy, trade and regulation for the investment implications.

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Market commentary Asset class views
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A tight race
U.S. presidential candidate polling averages, Jan.-Sept. 2024

The chart shows that the polling average of the leading Democratic candidate has surged since President Joe Biden withdrew from the race and endorsed Vice President Kamala Harris.

Source: BlackRock Investment Institute, with data from RealClearPolitics and LSEG Datastream, September 19, 2024. Notes: The chart shows the average of the U.S. presidential election race results for Harris/Biden vs. Trump from election polls conducted by various U.S. polling agencies.

The U.S. presidential election outlook underwent a reset after Biden’s decision to drop out and endorse Harris as the Democratic nominee for president. Since then and following the debate this month, Harris has taken a slight lead in most national polls, according to RealClearPolitics data. See the chart. The race appears to be close in key battleground states where Harris has closed Trump’s lead and made the race more competitive. Harris’ policy views have mostly been consistent with Biden’s – though she has outlined a number of new proposals including expanding the child tax credit and offering financial support for homebuyers. Yet both candidates could face constraints on enacting their agenda – especially on fiscal policy – if their party doesn’t hold unified control of Congress. This comes as federal regulation may face new limits after recent Supreme Court decisions.

Neither party has prioritized tackling the budget deficit. Harris has largely adopted Biden’s tax plan, such as higher corporate taxes, with some key differences like the capital gains tax on wealthy households. Trump plans to fully extend the provisions of the Tax Cuts and Jobs Act (TCJA) expiring in 2025 and propose new cuts, including to corporate taxes. Trump says he will boost revenues by levying tariffs on a broad range of U.S. imports. Control of Congress will dictate the size and scope of TCJA extensions and any government spending cuts. Deficits are one reason we see inflation staying above pre-pandemic levels.

Sectoral policy impact

Energy would be a key policy priority of either administration, including bipartisan agreement on the need for permitting reform to build energy infrastructure. U.S. oil and gas output hit new highs under Biden, supporting the energy sector. A Harris administration would mean a continuation of current energy policies, including support for clean energy. Under a Trump administration, Republicans would look to boost energy production and scale back implementation of the Inflation Reduction Act, like credits for electric vehicles. Yet we think the act is unlikely to be repealed entirely.

We see trade as another area with macro implications. Both candidates are likely to pursue additional export controls on national security grounds, especially in advanced technology. On tariffs, Harris is likely to maintain the status quo, with the potential for more targeted tariffs against China. Trump’s proposed 60% tariffs on China and 10-20% broad tariffs would be a major escalation. Increased protectionism under either administration reinforces geopolitical and economic fragmentation, one of the structural factors we see keeping inflation higher medium term. Reduced legal immigration under either administration – though it is a centerpiece of Trump’s campaign – could also have implications on the labor market.

One area highly dependent on the election outcome is regulation. A Trump win could mean some deregulation, including the rolling back of regulation for banking in particular. Big tech may still be a target for bipartisan antitrust measures. By contrast, a Harris win could reshape the healthcare landscape through expanded Medicare or drug price caps.

Our bottom line

Policy differences between Harris and Trump are sharpening. Control of Congress will be key for assessing how their policy agendas could be implemented. We see potential impacts in sectors like energy, tech, healthcare and financials.

Market backdrop

U.S. stocks struck new all-time highs last week, with small cap stocks leading the way. Stocks regained their footing after the Fed delivered a larger 50-basis point rate cut. We think the Fed’s mixed messages – speaking of solid growth and many more rate cuts to come – could mean abrupt policy changes and volatility. U.S. 10-year Treasury yields inched up to around 3.75% after reaching 15-month lows. The curve between two- and 10-year yields hit its steepest levels since mid-2022.

We watch U.S. core PCE data, the Federal Reserve’s preferred measure of inflation, for August out this week. The Fed’s mixed messages after its 50-basis point policy rate cut last week show that it risks being surprised again if inflation proves sticky, as it was at the start of the year. The hotter-than-expected CPI for August was a reminder that inflation pressures remain, and wage gains have not eased enough for inflation to stay near the Fed’s 2% target.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while Brent crude is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of Sept. 19, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

Sept. 23

Global flash PMIs

Sept. 24

U.S. consumer confidence

Sept. 26

U.S. durable goods

Sept. 27

U.S. PCE

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, September 2024

  Reasons
Tactical  
AI and U.S. equities We see the AI buildout and adoption creating opportunities across sectors. We get selective, moving toward beneficiaries outside the tech sector. Broad-based earnings growth and a quality tilt make us overweight U.S. stocks overall.
Japanese equities A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Income in fixed income The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term credit. We’re neutral long-term U.S. Treasuries.
Strategic  
Private credit We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk.
Fixed income granularity We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook.

Note: Views are from a U.S. dollar perspective, September 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2024

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Asset Tactical view Commentary
Equities      
United States United States: tactical Overweight +1 We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins.
Europe Europe: tactical Underweight -1 We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
U.K. U.K.: tactical Overweight +1 We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Japan Japan: Overweight 1 We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Emerging markets Emerging markets: tactical Neutral We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high.
China China: tactical Neutral We are neutral. We see risks from weak consumer spending, even with measured policy support. An aging population and geopolitical risks are structural challenges.
Fixed income      
Short U.S. Treasuries Short U.S. Treasuries: tactical underweight -1 We are underweight. We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term.
Long U.S. Treasuries Long U.S. Treasuries: Neutral We are neutral. Markets have priced back in sharp Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on new economic data.
Global inflation-linked bonds Global inflation -linked bonds : Neutral We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds European bonds: tactical Neutral We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
UK Gilts U.K. gilts: tactical Neutral We are neutral. Gilt yields have tightened to U.S. Treasuries and market pricing of future yields is in line with our view.
Japan government bonds Japan government bonds: tactical Underweight -2 We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
China government bonds China government bonds: tactical Neutral We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS U.S. agency MBS: tactical neutral 01 We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG.
Short-term IG credit Short-term IG credit: tactical Overweight +1 We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S.
Long-term IG credit Long-term IG credit: tactical Underweight -1 We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global high yield Global high yield: tactical Neutral We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
Asia credit Asia credit: tactical Neutral We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging market - hard currency Emerging market-hard currency: tactical Neutral 00 We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
Emerging market - local currency Emerging market-local currency: tactical neutral We are neutral. Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security. 

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2024

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
Germany Germany: tactical neutral0-1 We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions.
France France: tactical Underweight -1 We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity.
Italy Italy: tactical Underweight -1 We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years.
Spain Spain: tactical neutral0-1 We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI.
Netherlands Netherlands: tactical Underweight -1 We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers.
Switzerland Switzerland: tactical Underweight 11 We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think.
UK UK: tactical neutral 00 We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Fixed income    
Euro area government bonds Euro area government bonds: tactical neutral 00 We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
German bunds German bunds: tactical neutral 00 We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs.
French OATs French OATs: tactical neutral 00 We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges.
Italian BTPs Italian BTPs: tactical Neutral 0 We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields.
UK gilts UK gilts: tactical neutral 00 We are neutral. Gilt yields have tightened to U.S. Treasuries and market pricing of future yields is in line with our view.
Swiss government bonds Swiss government bonds: tactical neutral 00 We are neutral. The Swiss National Bank cut policy rates twice this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here.
European inflation-linked bonds Euro area inflation-lined bonds: tactical neutral0-1 We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive.
European investment grade credit European investment grade credit: tactical Neutral We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the U.S. given spreads are not as tight.
European high yield European high yield: tactical Overweight +1 We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the U.S. Spreads compensate for risks of a potential pick-up in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, September 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

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Authors
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Catherine Kress
Catherine Kress
Head of Geopolitical Research – BlackRock Investment Institute
Christian Olinger
Christian Olinger
Portfolio Strategist – BlackRock Investment Institute

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