Investors have been keeping a sharp eye on the results of the elections this year, with all eyes on the implications of the ongoing US presidential race.
But according to Andrew Bell, chief executive officer of the £1.6bn Witan Investment Trust, “politicians matter far less than they like to think” when it comes to markets.
Indeed, despite investors' tendency to redistribute assets following election predictions, such as last month’s surge in investors pouring money into the ‘Trump trades’, historically there is no clear relationship between election results and market performance.
For example, in the US, the S&P 500 has made positive returns under both Democratic and Republican presidents since 1957, with discrepancies being the result of other economic developments rather than political allegiances.
Below he highlights three main themes for the coming months: inflation and interest rates; artificial intelligence (AI) and volatility.
Ditch the election obsession
Wider economic developments will have a greater impact on the global equity market than elections. Perhaps most notably, the potential for further interest rate reductions in developed markets is the thing investors need to focus on.
In June, the Bank of England elected to cut interest rates to 5% and positive inflation data in the US suggests the Federal Reserve may soon choose to do the same at its upcoming September meeting.
Bell said: “The underlying picture appears to be that interest rates are peaking around the world. So, people are now thinking as interest rates start to come down, we appear to have put the peak in inflation behind us, next year things should be a little bit better”.
This should be a net positive for stocks and, as such, next year investors will be focused on which markets are recovering, rather than which are falling, he said.
If developed economies could grow by even 1.5% for the rest of the year, the equity market will be in a much stronger position, Bell concluded.
A bi-partisan market
Optimism over the future of the equity market is further supported by the fact that many sectors enjoy bi-partisan support and are likely to experience continued investment regardless of election results.
The most notable of these sectors is technology, with companies such as the Magnificent Seven remaining highly lucrative investment opportunities that account for nearly a third of the S&P 500, despite recent poor performances.
AI, robotics and new forms of technology have continued to rise this year and have become highly attractive to investors. Markets such as these will lead to further enthusiasm for equities in 2025.
Witan chairman Andrew Ross said there is now a much stronger backdrop for equity markets, directed by “positive news around corporate earnings, centred on the boom in the semiconductor sector, and linked to investment in generative artificial intelligence systems.”
Recent volatility
However, it must be recognised that it has not all been smooth sailing for the equity markets this year. Poor recent non-farm payroll data from some of the leading tech firms damaged US investor confidence, with the S&P 500 experiencing its greatest daily drop since September 2022, as investors pulled out of equities.
Market summary of the S&P 500
Source – Google Finance
The index has fallen over the past month, sparking fears of a potential recession in US markets that have limited investment enthusiasm.
Nevertheless, Bell’s outlook for global equity markets was broadly positive. While elections and recent statistics represent a short-term policy risk, in the long term, "economics matter more".