The Economic Factors Driving the 2024 U.S. Election

As the U.S. election approaches, voters face economic uncertainty, with inflation and job growth influencing decisions amid a volatile market landscape. However, the hopes and fears of everyday Americans remain uncertain amidst recent economic fluctuations. While the nation grapples with high inflation and increased inequality, employment levels have risen, and the stock market has reached record highs. Investors are keenly watching how the election outcome will influence the balance between expected returns and volatility in bonds and equities.

Inflation plays a critical role in shaping market expectations. For instance, if nominal fixed-rate bond yields stand at 5% while inflation hovers around 2%, the expected real return from bonds would be approximately 3%. The recent stabilization in inflation has led investors to view bond markets as offering decent prospective real returns. Following the Federal Reserve’s interest rate cut of 50 basis points on September 18, bond yields have fluctuated, reflecting a complex mix of policy uncertainty and a potential return to a neutral interest rate level by 2025.

The market-based expected inflation rate for the next ten years is about 2.3%, with the nominal yield on 10-year Treasury bonds at 4.2%. This yields real prospective returns of just under 2% annually, which may be appealing as a risk-free investment.

For voters, the narrative around inflation is much more personal. As they prepare to cast their ballots, the price of essentials such as food, energy, transportation, and healthcare significantly influences their decision-making. Official Consumer Price Index (CPI) data indicates that food prices have surged by 26% since 2020, a statistic that voters are likely to keep in mind as they assess their standard of living and consider whether to support the incumbent administration.

The Economic Factors Driving the 2024 U.S. Election

Historically, the consumer price index increased 20% from November 2020 to September 2024 under the current administration, marking the highest accumulated price rise during a presidential term since Ronald Reagan’s first term (1981-1985). This data reflects a growing dissatisfaction among voters, who perceive rising costs for necessities as detrimental to their quality of life.

While inflation is a pivotal factor, it is not the sole determinant of the election outcome. Low unemployment rates, a robust stock market, and a recovering housing sector might favor Vice President Kamala Harris. However, issues such as immigration and the so-called “leftist woke agenda” present challenges that could sway public opinion against her candidacy.

Bond market volatility has escalated over the past month, complicating predictions for long-term yields. Investors are wary, knowing that uncertain economic policies could lead to a more unstable fiscal outlook, impacting corporate cash flows and overall economic performance.

Ultimately, the sustainability of U.S. economic growth remains crucial for investors. If higher interest rates fail to precipitate a recession, one must consider what might. Disruptions in spending due to policy changes could have significant repercussions, leading to a reassessment of risk premiums in the Treasury market.

As we navigate this electoral season, the relationship between monetary policy, fiscal uncertainty, and corporate revenues remains tenuous. Investors face challenges in making long-term strategic asset allocation decisions regarding U.S. financial assets that have historically yielded strong returns.

Looking Ahead

As the election date approaches, the economic landscape is fraught with uncertainty. Various outcomes could influence both equity and bond returns, but historically, GDP growth and equity performance have shown remarkable stability, irrespective of the occupant of the Oval Office. With much at stake, the coming weeks will provide critical insights into the future direction of the U.S. economy.

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