At a glance:

  • US Presidential Cycle Boost: The fourth year of the US Presidential cycle typically boosts equity markets as the incumbent aims for economic growth. Initial 2024 success has slowed with persistent inflation, affecting markets.
  • Market Reactions and Strategy: Geopolitical crises cause temporary market shocks, leading to counterproductive selling. Despite a recent correction, equities are still favoured over bonds due to expected policy easing and earnings growth.
  • Franklin Templeton Insights:
    • Global economic growth is improving with resilient consumers.
    • Inflation is decreasing but remains above targets; a rate cut is possible later in the summer.
    • Policy easing is expected soon, balancing growth and inflation, with varied outcomes.
    • Favouring riskier assets due to a positive macro environment.
  • Global Conditions and Bonds: Higher bond yields increase return potential, with easing cycles likely this year. Global economies show improvement, avoiding recessions, with resilient growth in India and China, despite rising inflation pressures.

The fourth year of a US Presidential cycle has historically been positive for equity markets. The incumbent usually aims to boost economic growth to secure a favourable election result. Certainly, President Biden is trying to pull out all the stops this year and until recently, it has worked. In our March 2024 insights, we reported US GDP was forecast to grow +3.0% year/year in real terms in Q1 2024 and by a booming +6% per annum after accounting for inflation. However, more recent data suggest growth may be slowing, while inflation remains sticky. Despite a constructive growth outlook, global equity markets stumbled in April. This followed a sustained advance in which optimism built on positive price momentum and improving fundamentals moved markets off their bottom.

Although market shocks from war and geopolitical crises tend to temporarily affect long-term market growth, investors are often inclined to sell because of immediate uncertainty, hoping to reinvest in the market after the crisis has passed. Selling is counterproductive, locking in otherwise temporary losses and degrading the ability to participate in the next market recovery. After a healthy correction, catalysed by events in the Middle East, many managers believe markets still have greater performance potential than global bonds, and recommend staying the course with an equity preference. While rate cuts by the Federal Reserve look likely to be delayed, we expect policy easing this year to support equity markets with healthy earnings growth.

In a recent Note by Franklin Templeton, one of the world’s largest investment managers, they highlighted a number of key takeaways, which is a common view held by many managers. Specifically:

  • Growth is more constructive: Leading economic indicators continue to improve globally, and consumers are remarkably resilient.
  • Inflation risks evolving: Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels. U.S. consumer prices increased less than expected in April, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to financial market expectations for a late Summer interest rate cut.
  • Policy easing cycles to begin soon: Inflation progress allows policymakers leeway to balance growth and inflation objectives. Central banks remain cautious and will seek data that confirms disinflation before acting. In the West, some are likely to start cutting rates soon, but with a greater divergence of outcomes likely.
  • Allocation toward risk: An improving macro environment is typically associated with strong markets, which causes managers to maintain a tilt toward riskier assets. Policy changes may balance growth and inflation surprises, but the collective mix remains constructive.
  • More attractive yields for bonds: Higher yields more recently have been boosting the return potential from global bonds, especially lower-risk government bonds. Easing cycles are likely to begin this year, and we find market expectations to be fair.

Outside the US, economic conditions have improved, though remain below trend. Europe, the UK and Japan have avoided recession while growth in India and China remain resilient. The global composite PMI, which includes manufacturing and services sectors, registered its fifth consecutive month of expansion in April which was its strongest growth in nine months. However, inflationary pressures have also risen internationally, and remain above central bank target levels.