As we head towards November’s presidential election, U.S. equity markets are expected to stay volatile. However, investors should prioritize the policies of the candidates over the heated rhetoric from their political parties, according to Richard Madigan, Chief Investment Officer of JPMorgan Private Bank.
Madigan emphasized that while there are distinct investment strategies aligned with the Republican and Democratic parties, these strategies are rooted in broader themes. “There is a Republican Party trade and there is a Democratic Party trade. But it’s anchored on themes,” he explained during an appearance at the Reuters Global Markets Forum. When questioned about the presence of a “Trump-trade” in the market, Madigan noted that both parties’ policies, despite their differences, could lead to increased Treasury issuance and fiscal deficits, which in turn may exacerbate inflation and affect bond markets.
The Trump trade, driven by expectations that Republican nominee Donald Trump’s tax policies would boost corporate profits at the expense of the country’s long-term budget health, gained traction after President Joe Biden’s lackluster performance in a recent TV debate. However, Wall Street started strong this week after Biden’s unexpected announcement on Sunday that he would withdraw from the race, endorsing Vice President Kamala Harris for the November election. This prompted investors to shift back to mega-cap growth stocks, cooling the recent surge in small-cap stocks. U.S. government bond investors also adjusted their positions, anticipating the potential for a second Trump presidency.
Madigan suggested that the S&P 500 is unlikely to deliver the substantial returns seen earlier this year. JPMorgan Private Bank adjusted its strategy, stepping back from an “overweight” position on equity when the benchmark index reached 5,600 earlier this month. Yet, according to Madigan, the most critical factor isn’t the presidential race outcome, but rather the composition of Congress. “If we end up with a sweep one way or the other, they put a great deal more focus on the policy narrative, because you can actually get actions from it, it’s no longer just words,” he stated.
Currently, the U.S. Senate is narrowly controlled by Democrats, while Republicans hold a slight edge in the House of Representatives. This balance of power could significantly impact policy-making and, consequently, market dynamics.
Madigan pointed out that Big Tech companies and those dubbed the Magnificent Seven have consistently outperformed, while small-cap companies struggle with high debt levels, low earnings, and thin margins. Despite these challenges, he anticipates continued market volatility in the coming months, driven by high valuations and political headlines.
“If I don’t think I’m playing for higher short-term returns in the equity market and I’m getting more volatility, I can have a very clear view on default risk and on yields,” Madigan said. He highlighted his preference for U.S. high-yield, European high-yield, and emerging market debt, maintaining an “overweight” position in these areas.
As we navigate this tumultuous period, Madigan’s insights serve as a reminder for investors to focus on the underlying policies rather than the noise of political campaigns. By keeping a keen eye on how congressional dynamics might shape policy, investors can better position themselves amid the market’s fluctuations.
