Dear Friend:

Every four years as the U.S. Presidential election approaches, clients often express concerns about how to position their portfolios, with suggestions ranging from selling everything to buying certain sectors based on perceived policy benefits. At Noesis, we closely monitor global politics but believe its long-term impact on the economy is overstated. Instead, our focus remains on the fundamentals, valuation, and the long-term outlook of industries and companies.

We have communicated this investment discipline before. For example, in our October 2012 newsletter, prior to President Obama’s reelection, we wrote:

“At Noesis, we continue to make investment decisions based on company fundamentals and valuation, instead of timing markets, as we believe they are the primary drivers of long-term investment success.”

Again, in July 2016, shortly after the Brexit referendum and ahead of President Trump’s election, we stated:

“At this uncertain time, our investment philosophy is even more important as we remain focused on our companies’ fundamentals and long-term prospects.”

And in January 2021, amid the pandemic and after President Biden’s election, we noted:

“We monitor the macro environment but never allow the market sentiment to drive our decisions. We do not believe the markets are always rational and fully efficient in the short term, so we maintain flexibility in the portfolios for possible actions.”

Now in October 2024, we remain consistent in our message to not overemphasize politics. This year’s election is expected to be tight again, with a possible outcome of divided government between the Senate and the House of Representatives. This reduces the likelihood of drastic policy changes and increases the need for compromises. Also, elections are a source of uncertainty, which markets do not like. Historically, markets tend to rise post-election as uncertainty fades, as seen in the Presidential elections since 1980, with the exceptions of the Tech Bubble in 2000 and the Great Financial Crisis in 2008.

Source: Standard & Poor’s, Factset, J.P. Morgan Asset Management

Political support for certain sectors does not necessarily result in their outperformance. For example, President Biden campaigned to reduce the use of fossil fuels and promoted renewables through the Inflation Reduction Act. Whereas President Trump campaigned to support the traditional energy industry. However, actual sector performance was contrary to the perceived policy benefits. Under Trump’s presidency, the Energy sector underperformed, while the Clean Energy sector outperformed. Conversely, under President Biden, the Energy sector rebounded, while the Clean Energy sector fell (see chart below). Ultimately, economic factors such as the supply-demand balance of oil, rising interest rates, and company valuations drove performance more than White House policies.

Source: FactSet, J.P. Morgan Asset Management. data are as of 08/31/2024

Moreover, perceptions of economic conditions can be skewed by political preferences. A survey conducted regularly by the Pew Research Center on the state of the U.S. economy shows that those who identify as Republican rate the economy more favorably during a Republican presidency, while Democrats hold a favorable view under Democratic leadership, as shown in the chart below. Investors would have missed strong market returns if they stayed uninvested due to their partisan view. Yet, despite these large swings in economic perceptions, the U.S. economy has grown at an average rate of 2% through each administration. This highlights that markets and the economy are larger than politics. Consumer spending, which accounts for 68% of the economy, is the main engine. It also reassures that regardless of the promises made before the election, the actual implementation is often less pronounced due to the checks and balances of U.S. democracy.

Source: Pew Research Center, J.P. Morgan Asset Management

Inflation and Interest Rates

Inflation peaked during the summer of 2022, and most components have been trending downward since then. The more persistent service inflation started to decline this year as well, partly driven by wages, which slowed to their long-term average of around 4% growth. The exception is shelter, which measures the price increase of renting or owning a home, and with a high weight of around 33%, it remains the main inflation driver (see chart below).

Source: BLS, FactSet, J.P. Morgan Asset Management

With inflation under control and the labor market slowing, the Federal Reserve (Fed) began cutting interest rates in September. Fixed income markets had already anticipated the Fed’s action, and bond yields gradually adjusted lower starting in July. Outside the U.S., inflation is also declining in Europe, China, and Australia, prompting local central banks to begin reducing interest rates. Over recent quarters, we have increased fixed income allocations in your portfolios in response to rising interest rates and extended duration by purchasing medium- to long-term high-quality bonds. While the peak in yield levels may have passed, real yields – after deducting inflation – remain attractive, and we continue to search for additional opportunities.

Conclusion: Stay Disciplined

We believe investors should not lose focus of the fundamentals of economies, industries, and companies. Economic cycles and market forces, such as inflation and interest rates, are more robust than political shifts and often outweigh any policies or intentions by the White House. Perceptions of economic conditions and the investment environment can be shaped by political preferences and lead to missed opportunities or costly mistakes. We remain committed to our investment discipline, conduct our thorough research, and invest in high-quality businesses at a reasonable price.

On behalf of the Noesis Research Team,

Christian Paterok, CFA