The US is heading to the polls in November. The results will decide the US president, senators and congressmen, but for markets and the economy, the impact is likely to be more muted than the hype might suggest.
A Donald Trump victory would surprise investors and may trigger volatility in global markets. However, with our base case of a divided government (Hillary Clinton in the White House and Republican majority in congress), the US economic growth story may be on track regardless of November’s results.
The rise of non-establishment candidates Donald Trump and Senator Bernie Sanders is indicative of a deeper issue. The pace of the US recovery in this cycle has been more sluggish than most, and the existing gains in US growth have not been distributed evenly across income brackets.
Real income growth has been extremely slow, and while wealthy households have enjoyed a boost from rising stock and home prices, middle income households have been disproportionately penalized by ultra low interest rates. This week’s chart shows that, since 1990, the top fifth of the US population has achieved seven times the growth in real income than the bottom fifth of the population.
While the odds of Hillary Clinton winning the presidency are near 70 per cent, it is not predicted that congress will have a Democrat majority. (The presidential winner need not be from the same party as the congress majority). With a Democratic president and Republican majority in congress, major policy changes are unlikely to get passed.
One of my senior colleagues at J.P. Morgan Asset Management in the US, Andrew Goldberg, summarized the takeaways for investors this way: “Fundamentals – not this election – will be the more important drivers of asset prices in the coming years. Investors should focus on valuations, the health of corporate balance sheets, the level of interest rates, the path for the US dollar and the economic cycle, all of which will have a greater influence on portfolios.”
While corporate profits, employment, investment and top line economic growth are all interconnected, it is actually corporate profits that contract before a recession. History tells us that while employment growth and investment growth fall during a recession, corporate profits drop a few years before.
Until there is a sustained fall in corporate profits, the US economy is relying on the strength of the US consumer. The consumer is the backbone of the US economy, with 69 per cent of GDP made up of consumption.
When American consumers have jobs and are confident, they are more likely to spend, and currently their confidence is at a multi-year high, while jobless claims are at record lows. Two other helpful indicators are housing starts and the Conference Board Leading indicator, both of which are at post-crisis highs.
Most recently, the US ISM Non-manufacturing posted an impressive monthly gain that supports the US economic growth picture, certainly for the near term. This reading of 57.1 was well above consensus expectations (53.0) and the monthly jump was the highest on record. Until these data start to turn, we remain positive on our outlook for moderate US growth in the near term.
The November election is expected to cause some short-term market volatility in US assets, but macroeconomic forces, in particular, like a stable US dollar (falling 2 per cent YTD) and increasing oil prices (rising 32 per cent YTD) means EPS growth for US equities is expected to better toward the end of this year. We continue to favor the US for its status as a high-quality, safe harbor market.
Regardless of who wins the election, investors should expect a US recession at some point during the next four years. Economic indicators currently suggest a strong economy, but at J.P. Morgan we continue to monitor several key indicators to assess when this may change.
Source: J.P. Morgan Asset Management 4Q16 Guide to the Markets – U.S.
By Nandini Ramakrishnan, Global Market Strategist, J.P. Morgan Asset Management
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