U.S. Presidential Race Impact on Markets: Should We Worry?

Market Week in Review's latest edition featured a discussion between Senior Director and Chief Investment Strategist for North America, Paul Eitelman, and Equity Manager Research Analyst Michelle Batjargal. The dialogue revolved around the ongoing rotation of small-cap stocks in the U.S. equity market, the potential market impacts of recent U.S. political developments, and an update on the Bank of Canada's (BoC) latest rate decision.

The conversation kicked off with an analysis of the continued rally in U.S. small-cap stocks since July 11th, following data from the Labor Department indicating that inflation had eased further in June. Jordan McCall has highlighted this shift towards smaller companies in two articles, highlighting both struggle and success phases for these entities.

Eitelman pointed out that during the week ending July 25th, the Russell 2000® Index tracking small-cap stocks rose approximately 2%, while the Nasdaq 100 Index declined by about 3%. He attributed this performance gap to disappointing second-quarter earnings from mega-cap firms like Tesla and Alphabet.

Looking ahead, Eitelman suggested that upcoming quarterly earnings reports would provide valuable insights into whether this trend away from large caps is sustainable or not.

Switching gears to politics, Batjargal asked about implications stemming from President Joe Biden’s surprising decision to drop his re-election bid, backing Vice President Kamala Harris instead.

Eitelman remarked that Harris' entry could potentially make the presidential contest more competitive, as she seems set to run on Biden's existing policy platform without introducing any significant changes that might trigger volatility among investors.

However, he doesn't foresee significant upheavals resulting from election season over the coming months, except for possible leadership reshuffling at the Federal Reserve if the presidency changes hands—a factor warranting close attention due to its potential impact on markets' stability.

The duo then turned their focus northward, discussing BoC’s recent decision to lower benchmark rates by another quarter-percentage point to 4.5%. Eitelman noted that BoC was the first among G7 nations to make back-to-back cuts in this cycle, citing progress on inflation control and economic weakness as key contributing factors.

Eitelman predicted a possible third rate cut by the BoC in September, ahead of the Fed's expected move, considering ongoing economic challenges.

The discussion illuminated several key trends shaping the current investment landscape: continued rotation into small-cap stocks, political developments with potential market implications, and central bank strategies amidst global economic pressures. Investors should closely monitor these evolving dynamics to make informed decisions.