NO LONGER A ONE-HORSE RACE
With Kamala Harris now leading the Democratic campaign, United States (US) election polls have changed drastically. It is no longer a one-horse race. The polls suggest this election might have a neck-and-neck finish. This week, we explore some of the opposing policies and how the economy performed in the past two presidential terms.
THE WEEK’S KEY THEMES:
- The US elephant in the room – US debt
- US 10-year Treasury yields hover at a two-week low
- JSE hits record highs
- Oil rises following four sessions of losses
- Currencies set their sights on feedback from the Jackson Hole Economic Symposium
US ELECTION – CONTESTED ON AN ECONOMIC PLATFORM
As the 2024 US presidential election draws near, economic performance under the leadership of President Joe Biden and former President Donald Trump has become a central issue. With Kamala Harris now leading the Democratic ticket after replacing Biden, the election is poised to be intensely contested, with voters keenly aware of the divergent economic outcomes under each administration. The direction of the US economy hinges on this election, as voters consider how each candidate’s policies could shape the future regarding growth, inflation, employment, and the mounting federal deficit.
A TALE OF TWO ECONOMIES: TRUMP VS BIDEN
During Donald Trump’s presidency, the US economy saw significant growth, particularly in the first three years, with an annual gross domestic product (GDP) increase of 2.7%. However, this positive trend was disrupted in his final year due to the COVID-19 pandemic, which led to a severe economic downturn in the US and around the globe, reducing his overall growth average to 1.4%. On the other hand, Joe Biden’s term began with the heavy burden of the pandemic on its shoulders but then rebounded with a surge in GDP growth, which reached 5.9% in 2021. While phenomenal, this growth rate can partially be attributed to a low-base effect, before moderating to more stable levels in the following years.
The stock market also reflects the different economic climates under these two leaders. Trump’s tenure was marked by a strong S&P 500 performance, with an annualised return of 16.3%, signalling robust investor confidence, attributed to some of Trump’s profit-friendly policies. However, notable, under Biden, the market continued to perform well, even as we witnessed a slightly lower annualised return of 12.5%. While both administrations navigated through significant economic challenges, Biden faced a more complex global environment, including the ongoing pandemic fallout and geopolitical tensions from the Russia-Ukraine conflict, followed by the war in the Gaza Strip.
Inflation has been a significant hurdle for the Biden administration. Still, one must be careful not to overlook that the employment market and strong economic growth contradicted many other developed markets, with the phrase “American Exceptionalism” making its way to the fore.
Under Biden’s leadership, manufacturing and goods prices have surged by 19% over the first 42 months, a sharp contrast to the 6% increase seen during Trump’s term. This spike in inflation, driven by supply chain issues and post-pandemic demand, has overshadowed other economic gains and remains a critical concern for American households. However, one cannot solely blame Biden’s administration but rather a combination of geopolitical factors coupled with loose monetary and fiscal policy.
Both administrations have overseen strong job markets. Biden’s presidency witnessed an 11% rise in overall employment and significant wage growth, much of which is linked to the recovery from the pandemic-induced recession. Trump, before the pandemic struck, achieved historically low unemployment rates and consistent wage growth, though these gains were reversed as the pandemic took hold in 2020.
THE 2024 ECONOMIC LANDSCAPE
Mixed signals characterise the current state of the US economy. While GDP growth has stabilised and unemployment remains relatively low, high interest rates, used to combat inflation, are dampening consumer confidence.
However, the elephant in the room is the contentious issue of federal debt. In the last four years, US federal debt has surged to $35.2 trillion, significantly higher than when Biden assumed office, raising concerns about the sustainability of current fiscal policies.
The federal budget deficit remains a menacing issue, with projections suggesting it will hover near 7% of GDP in the coming years. This level of deficit during peacetime is unprecedented and raises alarms about the potential for rising interest costs to crowd out private investment and other essential government spending.
DIVERGING POLICY PATHS: HARRIS VS TRUMP
Kamala Harris has articulated an economic agenda centred on reducing costs for the middle class, particularly in healthcare, housing, and essential goods. Her proposals include capping prescription drug prices, providing substantial down payment assistance to first-time homebuyers, and expanding tax credits for families. These initiatives, while designed to ease Americans’ financial burdens, may further exacerbate the federal budget deficit, given the country’s existing fiscal challenges.
Donald Trump’s policy approach, in contrast, is focused on tax cuts, deregulation, and energy independence. His agenda includes extending the 2017 Tax Cuts and Jobs Act (TCJA), aiming to boost economic growth by reducing the tax burden on individuals and businesses. However, these tax cuts could also significantly increase the federal deficit, potentially adding nearly $5 trillion to the national debt over the next decade. Trump’s strategy also includes aggressive trade policies and tariffs intended to protect American industries, which could have varied impacts depending on their execution and global economic conditions.
THE FISCAL CROSSROADS
The next administration will inherit significant fiscal challenges regardless of the election’s outcome. The US is on a precarious budgetary path, with deficits expected to remain high even during periods of economic expansion. The looming expiration of key provisions of the TCJA at the end of 2025 represents a critical juncture. Extending these provisions, as Trump advocates, would avert a significant fiscal tightening but at the expense of further widening the deficit.
Harris’s economic plans, while focused on immediate consumer relief, still lack the depth to address the nation’s long-term fiscal sustainability issues. Both candidates will need to carefully balance stimulating the economy with managing the growing national debt. The federal deficit is projected to continue increasing, which could drive up interest rates and reduce the government’s ability to fund other critical programs.
A PIVOTAL DECISION
The 2024 election offers voters a clear choice between two contrasting economic philosophies. Harris’s policies aim to address the immediate financial needs of the middle class and curb inflation, while Trump’s approach emphasises tax cuts and deregulation to spur growth. Both paths come with their own set of unique yet significant risks.
MARKETS IN A NUTSHELL
MARKETS SITTING IN WAIT FOR JEROME POWELL
This week, the yield on the US 10-year Treasury note remained around 3.8%, close to two-week lows, as investors awaited US Federal Reserve (Fed) Chair, Jerome Powell’s upcoming speech at the Jackson Hole Economic Symposium. His speech is expected to provide insight into the Fed’s approach to interest rate cuts, particularly considering the recent Fed minutes indicating a consensus among members to ease policy if data trends continue as expected. The US Non-Farm Payrolls revision downward by nearly 820,000 jobs for the year ending March 2024 further fuelled concerns about the US labour market, reinforcing expectations for a September rate cut of 25 basis points, with total easing potentially reaching 100 basis points by year-end.
In the United Kingdom (UK), the 10-year gilt yield increased to 3.93% following strong growth data in British business activity, with the UK S&P Global Composite Purchasing Managers’ Index (PMI) rising to 53.4 in August. This indicates that the UK economy is expanding at a quarterly rate of 0.3%.
Meanwhile, in South Africa, the R2030 government bond yield hovered around 9.40%, its highest level in three weeks, as markets awaited news from Jackson Hole.
EQUITIES MIXED ON INTEREST RATE SPECULATION
US equities showed mixed performance as investors speculated on the extent of the Fed’s potential rate cuts. The S&P 500 remained relatively flat, the Nasdaq Composite dipped slightly, and the Dow Jones Industrial Average fell by 0.2%. Investors are closely watching the Jackson Hole symposium for clues on future policy moves. Notably, media and entertainment company, Paramount’s shares rose on an improved takeover bid, while data cloud company, Snowflake’s stock dropped due to disappointing sales projections.
In the UK, the main stock market index (GB100) increased by 546 points, reflecting a 7.06% gain since the beginning of 2024. Frankfurt’s DAX also edged higher, crossing the 18,500 mark, supported by dovish expectations for the Fed and a stronger eurozone PMI, despite mixed signals from German economic data.
South Africa’s Johannesburg Stock Exchange reached record highs, driven by global market sentiment and expectations of Fed rate cuts. Among individual stocks, cloud company, Karooooo, renewable energy firm, Montauk Renewables, and investment and development company, Shaftesbury Capital, were notable gainers.
OIL REBOUNDS AFTER FOUR-DAY LOSING STREAK
Brent crude oil futures rebounded to near $77.00/barrel after a four-day decline, despite concerns about a potential US economic slowdown and weak global growth projections for 2025. The rebound was driven by a drop in oil inventories, but fears of economic weakness in China and the potential for increased expanded Organisation of the Petroleum Exporting Countries, OPEC+, oil supplies in the coming quarter weighed on the market. Traders are now focusing on Fed Chair, Jerome Powell’s speech at Jackson Hole for further insights into the Fed’s economic strategy.
Gold prices eased to around $2,500/ounce, remaining close to record levels as markets continued to assess the Fed’s dovish stance. The recent downward revision of US Non-Farm Payrolls data and weaker labour market data strengthened the case for aggressive rate cuts, with markets anticipating 100 basis points worth of cuts by the end of the year.
RATE CUT EXPECTATIONS WEIGH ON THE GREENBACK
The US Dollar Index traded around 101.2 on Thursday, having declined for four consecutive sessions to its lowest levels of the year. This decline was attributed to rising expectations of a Fed rate cut in September. The dollar weakened against major currencies, including the euro, sterling, and others.
The euro dipped below $1.113/€, retreating from a one-year high, as slower wage growth in the eurozone fuelled expectations for a European Central Bank rate cut. Similarly, the British pound rose above $1.31/£, buoyed by strong growth in UK manufacturing and services activity.
The South African rand traded just below the R18.00/$ mark on the back of profit-taking, following the recent robust rally on the back of expectations of a rate cut by the South African Reserve Bank in September and the improving outlook for consumers and households in South Africa.
Key Indicators:
USD/ZAR: 17.99
EUR/ZAR: 20.00
GBP/ZAR: 23.58
BRENT CRUDE: $77.21
GOLD: $2,491.51
Sources: Bloomberg, Reuters, Forbes, Financial Times, UBS US Fiscal Outlook and Trading Economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
Weekly Wrap content provided by Citadel Pty Ltd.
