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It is now less than 2 weeks to the Labour budget in the UK and less than 3 weeks to the US election. These two events will, I’d guess, affect us all financially and emotionally (and some more than others I’d guess) but so far, from a market perspective at least, they have been non-events.
For the UK budget at least, I’d expect this nonchalance to continue. This was, of course, very much not the case for Liz Truss. But in 2022 inflation was spiralling out of control and the Bank of England was furiously raising rates to try and bring it down again. A budget that put the foot on the accelerator just as central banks were hitting the brakes hard unsurprisingly caused an accident. Today, whatever the government spin is, we are in much better shape. UK inflation again undershot expectations (and the Bank’s 2% target) this week.
Ironically, a Liz Truss style budget might even be welcomed by markets in today’s environment. The Bank of England will be cutting rates into an economy that has resilient growth, low unemployment and falling wage growth. Whatever the government spin is, this is a pretty good hand of cards to be dealt. We will see how they play it but with inflation back under control I’d be very surprised if we saw much reaction from the Gilts market, let alone the open rebellion that ended Liz Truss in 2022.
Instead, I think interest rate markets will be much more sensitive to what happens in the US. Trump is pro-tariffs and pro-tax cuts. Tariffs will push up the prices of imported goods, tax cuts will add to demand. Both these feel pretty inflationary to me. I remain optimistic longer term that US inflation will continue its journey lower and tariff effects are normally a one-off hit rather than anything permanent. That said, this will surely slow the rate of cutting by the US Fed (6 cuts are currently expected in the next 15 months). And anything that pushes up US bond yields will probably keep UK ones higher than they would have been as well.
My gut is that most professional investors think Trump will out-perform his polls as he did in 2016 (but not, notably, in 2020) and so win a close election. But the truth is there are very few undecided voters left in the US and the election remains a toss up between Trump and Harris. I think the lack of market reaction to US election news is not because markets won’t move after the election result (they will) but because it is impossible to know today where we are heading. My go to election forecaster is Nate Silver (formerly of 538 and the New York Times) and his latest forecast is below. This has moved a little in Trump’s direction recently but the race is essentially a toss up and I wouldn’t expect that to change much between now and November 5th.
We have added a bit of yield to our fixed income book (which should work better with more Trump style pro-growth policies) but apart from that tweak there isn’t much to do but wait. I like the diversification and balance we have in our portfolios today. I hope I still feel that way in three weeks’ time.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
