Weekly Wisdom January 18, 2024

By Hightower Great Lakes on January 18, 2024

A Global Election Year

The U.S. presidential race will continue to make headlines in 2024 as we move through the campaign season. One of the benefits of an election year, interestingly, is the market performance that comes with it.

Since World War II, the S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%.[1]

A nice boost when considering the average return of the S&P 500 has been around 7.5% since 1928.[2] This year is also unique because there will be over two dozen economies that are holding general elections in 2024 – accounting for over 60% of the world’s economic output and more than half its population.[3] The world may seem much different in 2025…

The U.S. Election

Looking back on 2023, the Federal Reserve’s monetary policy path and the strength of the U.S. economy took the spotlight, as markets outperformed the expectations of many strategists – and many folks in general.

So far in 2024, we have heard much of the same as markets stay focused on the Federal Reserve and whether it will cut rates. Meanwhile, the GDP is running at a 2.5% annualized rate. In other words, the GDP is still growing above trend.

After listening to Donald Trump’s speech at the Iowa caucus this week, it became clear that the former president’s agenda prioritizes lower energy prices, border security and lower taxes. This is similar to his 2016 campaign which boosted a broad range of sectors on the expectation of a looser fiscal policy.

If the former president keeps a similar playbook, we are also keeping an eye on geopolitics and the use of tariffs on other countries, as that was a strategy that Donald Trump used to his advantage.

On his campaign, he has promised to reign in excessive government spending on foreign aid, climate subsidies, immigration and other areas.[4]

On the other side, President Joe Biden and the democrats have different plans than the former president, which is taking a victory lap on a growing economy and increased likelihood for avoiding a recession. In the past three years, the government passed a $1 trillion infrastructure bill, the CHIPS and Science Act and the Inflation Reduction Act.

These bills have had broad implications for the U.S. economy, driving it towards the future. President Biden and his team have been forthright about lowering healthcare costs and helping American citizens on Medicare.

This year’s election will be the headlining story all year. We always have our eye on the drivers of the U.S. economy and indicators like retail sales, housing metrics, industrial production and the labor market. 

Chart 1: Iowa Caucus 2024 Results[5]

Red Sea Conflict Intensifies  

The situation in the Red Sea, which is an expansion the Israel-Palestine War continues to expand and involve other nations including Iraq, Pakistan and the U.S. The United Kingdom and the U.S. carried out upwards of 73 air strikes in Yemen targeting Iranian-backed Houthi rebels who continue to attack ships in the Red Sea.[6]

The Houthis continue to target merchant and military vessels within the Red Sea, this includes but is not limited to, a failed missile strike on the U.S.’ USS Laboon, as well as a successful missile strike on a U.S.-owned bulk carrier ship.[7]

Iran’s revolutionary guard, known as the IRGC, is now present on the ground in Yemen directly.[8] The IRGC has also expanded the conflict to reach outside of Yemen and the Red Sea. Several explosions killed four people and injured six near the U.S. consulate in Erbil, Iraq, with no U.S. assets or personnel impacted.

The IRGC claimed that they were targeting the “headquarters of spies” within Erbil.[9] The IRGC has also launched missiles into Pakistan, targeting two bases of the Baluchi militant group Jaish al Adl, which has previously attacked Iran at its Pakistani border.[10]

These further escalations of the conflict have caused numerous other companies to pull out of shipping via the Red Sea. Additional companies that are now avoiding the Red Sea include the energy giant Shell (SHEL) and the world’s second-largest LNG exporter QatarEnergy.[11]

As a reminder, before the conflict about 12% of the world’s shipping traffic moved through the Red Sea, but this has since fallen by around 65% from expected values.[12] This disruption of this key trade route and expansion of the conflict may have further implications on global markets as time passes, especially energy markets.

Iran’s military is now directly involved; Iran accounts for around 4% of the world’s crude oil supply as of 2022.[13] Right now little to no impact is being priced into the oil market but this could change quickly if the conflict develops further.

Chart 2: Daily Red Sea Freight Capacity[14]

A Win for Democracy in Taiwan

Over the last few years, geopolitics have been on center stage. One constant over that period has been heightened tensions between the U.S. and China. While tensions initially appeared to have thawed, the recent Taiwanese elections in which the pro-democracy Lai Ching-Te won did nothing to improve U.S.-China relations. Lai Ching-Te is the current Vice-President of Taiwan.

The elections deciding topics revolved largely around Taiwan’s large and influential neighbor, China, which has stood by its stance of a singular unified China. Following the victory, a Chinese government official remarked, “whatever changes take place in Taiwan, the basic fact that there is only one China in the world and Taiwan is part of China will not change.”[15]

Unsurprisingly, a different tone was projected from U.S. officials. U.S Secretary of State Antony Blinken restated the U.S. stance that Beijing and Taipei be, “free from coercion and pressure.”[16]

While this event does instill some geopolitical concern, we remain confident that the U.S. government is playing its cards right. The semiconductor industry is the key sector to be impacted, given Taiwan produces over 60% of the world’s semiconductors and 90% of the world’s advanced semiconductors.[17] Diversifying supply chains is part of the U.S. onshoring theme.

Click here to read last week’s Weekly Wisdom (1/12).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Reuters. As of January 12, 2024.

[2] Source: FactSet. As of January 16, 2024.

[3] Source: Reuters. As of January 15, 2024.

[4] Source: Bloomberg. As of January 10, 2024.

[5] BBC. As of January 15, 2024.

[6] Reuters. As of January 12, 2024.

[7] Reuters. As of January 15, 2024.

[8] Semafor. As of January 15, 2024.

[9] ABC News. As of January 15, 2024.

[10] NDTV. As of January 16, 2024.

[11] Reuters. As of January 15, 2024.

[12] Reuters. As of December 19, 2023.

[13] EIA. As of September 22, 2023.

[14] Reuters. As of January 15, 2024.

[15] Source: CNN. As of January 13, 2024.

[16] Source: Reuters. As of January 14, 2024.

[17] Source: The Economist. As of March 6, 2023.