I hope everyone had a happy Labor Day weekend. In an election year, the real campaign traditionally starts right after Labor Day, although with the changing of the guard within the Democratic Party and the repercussions, the campaign logically started once President Biden announced he wouldn’t seek reelection and Kamala Harris quickly became the presumptive nominee.
September is also historically the weakest month for stocks. Of course, we heard the same about August. Markets collapsed in early August for all of a few days as the yen carry trade unwound. The S&P 500 fell 8% in about a week. But it quickly regained footing and ended up 2% for the month. The Dow Industrials reached an all-time high this past Friday while the NASDAQ Composite closed down 5% amid profit taking among some of the largest big tech names.
The obvious question is where do we go from here? To examine the point, I want to look at the world today both economically and politically.
I’ll start with the politics. While many pundits argue they know little about Ms. Harris’ plans, particularly economically, I would suggest that her agenda is rather obvious. As a Senator, her record was as liberal as any. As VP, and since the campaign began, she has endorsed most of the wish list Biden has put into every budget request of the last four years. We may not know all the details, but we don’t really need to. She will push a progressive agenda as hard as Congress and the Courts will allow her to do.
As for Trump, he is not a traditional Republican conservative with any eyes toward fiscal control. Already he is promising child care credits, no taxes on tips, no taxes on Social Security receipts, and “free” in vitro fertilization. The only way he plans to pay for anything is to hike tariffs.
Let me stop there for a moment and make a few obvious (at least to me) observations.
1. They both lie. Elections are more about form over substance. Harris wants to project, always with a million-dollar smile, a world of happiness for all earning less than $400,000 paid for by everyone else. Since less that 2% of American households earn more than $400,000, that’s a message that resonates. Biden, of course had the same message and could only get a fraction of what he wanted accomplished. What he did get accomplished was to build more accumulated debt than any other President within the first four years. As for Trump, he promises tax cuts, all the promises mentioned above, the end to all wars, all to be paid for by tariffs.
2. They want to spend like drunken sailors. At least, that is what the promises suggest. But the likelihood is that the Senate will be divided 52-48 or closer, and whoever has a majority in the House is likely to have a margin of 10-15 seats at the most. We have seen over the past two years what Republicans have been able to accomplish with a majority of less than 10. Perhaps the most significant outcome under two different speakers was the expulsion of George Santos.
3. The economic course of this country is steered by the Federal Reserve, not the White House. Trump may want to interfere but Powell is in charge into 2026 and that isn’t about to change. If Congress and the Courts allow all the wish lists of either to become law, the Federal Reserve will have to step forward and defend price stability, full employment, and a stable currency. It has all the tools to do so.
The debate next week matters. Again, assuming this election will be about form over substance, the key will be how each presents himself or herself, no so much what they say. As noted earlier, Harris wants to appeal economically to the 98% that stand in her political dream to receive more than they are forced to give. Trump will also make promises as he has the past few weeks to broaden his base. Non-economic issues like abortion or immigration will take center stage at times, but the substance of where each stand is well known.
Biden lost the first debate because he simply looked and sounded old. Trump said little of substance to win the debate. He won it by default. Debate coaches will tell each to keep answers simple and brief using a few well-chosen words to make their point (or counterpoint). To be sure, there are points of danger, the most obvious being the war in the Middle East. But good politicians know how to dance around hot spots and both probably can do just that.
Thus, the bottom line is that the debate and the campaign are probably more fodder for MSNBC and FOX than for the Wall Street Journal.
Which now brings me to the economics. But as a segway, let me note that both candidates have positions on specific subjects that will be very meaningful to specific companies and industries.
1. Green initiatives. While Harris has backed away from support of a fracking ban, she isn’t likely to be the friend of the fossil fuel industry. With that said, the evolution of the EV as a true vehicle of choice will rest on the abilities of auto companies to deliver a better car at an attractive price. Better includes the evolution of a charging infrastructure that alleviates concerns about range.
2. Big tech. Both candidates are not necessarily pals with the tech companies. Trump likes Musk but that is about it. Even if Harris replaces Lina Khan, leaders of the FTC and the Justice Departments will want to limit abuses of power.
3. Regulation – While it is clear Trump is for less and Harris is for more, the impact company-to-company will be hard to measure
4.Taxes – The obvious difference is where each sees the corporate tax rate. If taxes go up, so will prices. If taxes go down, some of the savings may be banked but the biggest impact would likely be more money returned to shareholders, probably via stock buybacks.
5. Tariffs – While Trump makes more noise about tariffs, both use them to advantage U.S. companies. But large increases, as Trump proposes on the campaign trail, have repercussions, mostly negative. If one harks back to 2017 and Trump’s tariffs on imported steel and aluminum, while they had a short-term positive impact, the long-term benefits were largely non-existent. There has been virtually no growth in U.S. manufacturing over the past 7+ years.
6. Drugs – Both candidates will pressure drug pricing, each in his or her own way. If you aren’t going to touch Medicare benefits, you most assuredly have to put pressure on Medicare costs. Deficit control won’t be a front burner issue for either but it can’t be totally ignored.
7. Technology – One thing is simple. Technological advances account for all growth in the U.S. beyond increases in population. Whether it be kiosks in McDonald’s or ChatGPT, technology is the driver of growth. And no nation on this planet is better suited to build upon technological superiority than the United States. One can choose to oversee, regulate or tax the tech diaspora, but no one wants to kill the goose that lays the Golden Egg.
As for the economy near term, the key economic data point this week, or even this month, will be Friday’s August employment report. After seeing the recent update from the Labor Department that our economy produced over 800,000 fewer jobs from October through March, the average monthly gain per month of a bit over 150,000 jobs is consistent with GDP growth well below 10-year average rates of close to 2%. Meanwhile month-over-month PCE gains in prices announced last week suggest inflation for goods is at or even below the Fed’s 2% target. The Fed has a dual mandate. With inflation seemingly under control, the Fed’s near-term focus will be on employment and GDP growth.
Any gain in employment at or below 125,000 will signal to the Fed that it needs to get the restrictive Fed Funds rate back toward whatever it defines as neutral relatively quickly. Any gain close to 200,000 or higher allows it to proceed with less urgency. The 2-10 year Treasury yield curve has been inverted for several years, a record amount of time. While the high interest rates were impactful to slow inflation and return some slack to the labor market, their impact was less than might have been expected because so many homeowners wouldn’t sell existing homes with 3-4% mortgages. That doesn’t mean high rates weren’t impactful, the impact simply took longer to happen. The fact that Congress passed laws handing out trillions to people who couldn’t spend it while in Covid quarantine also delayed the impact. But excess savings are now gone, the savings rate is less than 3%, and credit card balances are rising. Is the Fed late? If Friday’s employment report is weak, one could expect a stock market correction and an almost 50-basis point reduction in the Fed Funds September 18th.
Does that mean recession? One data point means little. But the optimism that a soft landing was a fait accompli just a few months ago will evaporate.
Bottom line: Politics will govern our front pages from now to November 5 but as investors we are likely to learn little from that debate. The makeup of Congress will probably matter as much or more than who wins the White House. Meanwhile, the economy limps along. It is clearly time for a Fed Funds rate cut, the first of several. Changes within the White House, will more likely slow rather than accelerate the economy. No matter who wins, there will be new cabinet heads, new programs to get started, and some early confusion. The next six months can be a bit bumpy until the dust settles. I suspect the stock market may bump along with higher volatility until visibility increases.
Today, Olympian Shaun White is 38. Charlie Sheen is 59.
James M. Meyer, CFA 610-260-2220