MONTHLY MARKET MUSINGS

August 2024

Money & Politics

Following last month's rate cutting kickoff by the Bank of Canada (BoC), the Canadian central bank executed its second cut in July taking the overnight interest rate to 4.5% and motioned that there are more to come. CIBC Economics is now expecting two more cuts this year in both September and October with a pause in December. The estimate for year-end overnight rates remains at 4.0% and should come as a relief to Canadians who have been feeling the weight of the higher rates over the past year.

As we noted last month, on the U.S. side of things, the signs were clearly pointing to September for the beginning of the U.S. Federal Reserve's rate cutting cycle and that still seems to be the case. We have experienced higher volatility in the financial markets in the past few weeks due to the rotation across sectors as investors are seemingly shifting a bit of their technology sector enthusiasm into other broader market sectors. This suggests that gains for the back half of the year could possibly be more widespread and less concentrated than they have been in the first half of 2024. That said, a portion of the volatility can also be attributed to the commotion surrounding the U.S. election as July turned out to be a very lively month from a political standpoint within the U.S. We have experienced two seemingly unprecedented events all within about a week of each other - the attempted assassination of a former President and current Presidential candidate as well as the end of a sitting U.S. President's re-election campaign. It is probably safe to assume at this point that the 2024 U.S. Presidential election will go down as one of the most chaotic and dramatic U.S. Presidential races in modern history. The markets do typically experience increased volatility during an election year, leading up to an election and even in the few months that follow it. The market instability does tend to normalize afterwards and investors' attention reverts back to focusing on the underlying economic picture.[1] As we approach the most volatile and worse-performing months of the year (September and October), historically speaking, investors need to focus on the longer term big picture and not get flustered by the incessant noise.

Does My Investment Portfolio Even Care Who Wins The Election?

The answer to this is….no, not really. Putting politics aside, from a financial markets point of view it has been shown numerous times that the person sitting in the Oval Office has minimal impact on the markets over the longer term.[2] This tends to be mostly true even at the sector level. A political party may have policies that are more favourable to a particular sector, as an example, the Republicans are considered to be more favourable towards the oil & gas industry and that can have some shorter-term impact on the industry. But over the longer term, the energy sector will always be driven by its core fundamentals (global supply and demand) and that is generally not within the realm of control of a single President. Some people may also claim that certain political policies are more "economically friendly" and thus should be a clear positive for the markets and this can be true, in theory, to an extent. The reality is though that often, those policies are not easy to implement without the imposition of an overly bureaucratic and often gridlocked U.S. Congress. Additionally, those policies are also at the mercy of the current state of the economy that the President inherits which can be critical to the policies' success or failure. Government policies typically take considerable time to implement, and the markets overall tend to be more concerned with the economy, the business cycle, geopolitics, and the global macroeconomic picture.

What Is The Takeaway?

For most investors, the takeaway should be that while political party policies can add minor short-term instability to certain markets and industries, the overall equity markets have continued to follow an upward slopping trajectory over time. This suggests that investors should stay the course and try to avoid being influenced by politically motivated scare tactics and sensationalist headlines. The real focus should remain on corporate earnings, interest rates, inflation, and the strength of the U.S. consumer - all of which are infinitely more important to the financial markets than who will be President for the next four years.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com