What elections mean for markets this year

0:05Pushkin. The big risk everyone said for 2024 is this pesky thing called democracy. We've got elections all across the globe this year, and now we're really starting to see the effect on markets. We had elections in Mexico, which have hammered the peso. In India, it's been a real roller coaster. Coming up, we've got the UK and our bigger cousin, the US. So in today's podcast, we wade into the hostile waters of politics and ask, can you trade elections? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm markets columnist Katie Martin, and I'm joined by Robert Armstrong, the man behind the Unhedged newsletter.

0:49Katie, I've chosen this venue in this moment to announce that I am running for president of the United States. And let me tell you my platform, Katie. Cool. Yeah. Yeah. The Armstrong platform is when it comes to politics, you cannot outsmart the markets. There is no geopolitical alpha, folks. Is this a winning platform? I don't know that anyone's going to vote for you, Rob. This could be bad for you. I'm really good on TV, Katie.

1:26Better than on podcasts. I mean, you don't write about politics that much. No, I try to avoid it. I try to avoid it at all costs. Up until your previously unknown run for US president. I mean, why is that? I mean, is it because you're in roughly the same camp as I am, which is ignore politics. Markets do their own thing anyway. Point number one is it's very hard to predict how markets are going to respond to political changes. And the reason that's true is not because markets don't respond to politics. it's actually because they incorporate political information quite quickly and quite easily.

2:11In other words, markets are about as smart about the economic consequences of elections as it's possible to be. The information that is available is kind of very often in the price to begin with. And if there is a big bit of political news and markets do move, it's because there was a genuine surprise that might have been difficult or even impossible to anticipate. Let me tell you about some of those surprises, Robert Armstrong. Yes. So, first of all, we had elections the other day in Mexico. We have a new president in the form of Claudia Scheinbaum, the country's first female president. Now, I don't think it's because she's the first female president, but market's no likey.

2:50Mexican peso is off pretty hard. Three percent or so. Stocks took a six percent hit on the first day after the vote. I mean, to your mind, Rob, why is it that markets dislike this lady so much? According to the Financial Times, she won with a greater majority than expected, which means that she and her party, which was the ruling party before, might now be able to have a little fiddle with the Constitution. And if there's one thing markets don't like is people running around changing the rules. This is a slight exaggeration on my part, but I think that's basically the story. Yeah. Can they change the way judges are elected?

3:32There's something in there about the minimum wage inflation adjustment that they could change, etc., etc. So people are worried about institutional change driven by a big majority. Yeah, but the market really didn't see this one coming. They saw her coming, but they didn't see quite the scale of the victory. and then just like a day or so later India is a really tricky one to get your head around so first of all we had the exit polls saying current prime minister Narendra Modi you know he he is Indian politics he has been Indian politics for such a long time for years and years the exit poll said he was going to be back as prime minister and his party's going to have a majority and stocks hit a record high hooray yes but wait later we started to get the results actually come through.

4:18And it said he was going to have a diminished mandate. And so stocks did an absolute reverse ferret, went totally the other way, particularly stocks related to Gautam Adani, who's a close associate of Narendra Modi's. And a beneficiary of his big infrastructure programs. Exactly. And then just when you think you've got that kind of, you know, in hand, now it looks like he might actually or his party might actually lose the majority. and so all bets are off here and this is absolutely not what markets were expecting no and again markets no likey but almost for the opposite reason of mexico he got a smaller majority than expected perhaps no majority at all and that has sent markets down and a lot of this of course comes down to context india has been the best performing stock market in the world for quite a while now.

5:09And Modi is seen as an unapologetically friendly person towards the Indian business establishment. So that is big news, market moving news. The question is, could a really clever person have anticipated these outcomes, traded them and made money? Do you know any clever people? No, there's certainly none on this podcast. So we'll just have to pretend one is sitting here with us. But one thing we can say with some certainty is that there's a lot of people who will sell you their services. Say, I know what's going to happen. They live in Washington or London or New Delhi, and they will tell you that they have special insight into the political outcomes that are coming down the pike.

5:57And for a small fee, they will help you trade them. You can pay me some money for this insight if you want, but I'm here to tell you that it looks like Labour are going to win the next UK election. Yes. You heard it here first, folks. The polls are certainly swinging extremely strongly in Labour's favour. Look, there's a month to go. Anything can happen. But I can't think what that thing would be. You know, it looks pretty much baked in. And the markets don't care at all. My take on why the markets don't care at all is that this has kind of been a pretty well anticipated potential outcome for a really long time.

6:35And if anything, there would be more of a potential hit to markets if it looked like the Conservative Party was going to get back in again, on the basis that the last time they had a free reign over economic policy, we got Liz Truss. So, you know, so markets are incredibly relaxed, like much more relaxed than I've seen them in the past about the potential for a Labour victory on July the 4th. So yes, you can buy that political consultancy advice from me if you like. But what I can't tell you is who's going to win the US presidential election. I can't tell you that either. The Armstrong theory of what you can know about US elections is very simple.

7:16Your best guess is that the polls and specifically the polls in the swing states or the averages of polls of the swing states are about as smart as you can be. And they have a, you know, a meaty margin of error on either side, but sitting around trying to outwit the polls by saying things like, well, there's shy Republicans who don't want to tell the pollster and therefore all nudge it up. Or there's now there's shy Democrats or nani nani and all this and that. Those efforts to outwit the polls, in my experience, have not gone particularly well. So what do the polls say? The polls say that Donald Trump is ahead in the crucial swing states, and therefore, we have to bet that he is going to be the next president.

8:01Everyone said last time Trump won this election, well, if he wins, stocks are going to tank. Totally wrong. So people are a little bit reluctant, I think, to kind of really be prescriptive about what will happen if Trump wins again. But what's your guess? Before we get to my guess, let's talk about some guesses other people are making. There is a popular view afoot in the American media that a Trump election will be inflationary. So he will increase the deficit and the debt by cutting taxes again. he will impose harsh tariffs, which are according to some inflationary. And then he will elect some incredible toady Gollum like figure to head the Federal Reserve who will do exactly what he wants.

9:01And between these that for this for this job. If my presidential run doesn't work, I will make myself available to be Donald Trump's FOMC chair and Fed chair. So, you know, I think this theory kind of makes sense on its face, but I don't like predicting elections. You know what I like predicting even less? Donald Trump's behavior. You know, he's a cagey political operator who follows the winds of public opinion quite carefully and quite astutely. And I'm not going to run around predicting what he's going to do on day one because it will be changeable. So I lose track of whether we're supposed to be taking him literally but not seriously, seriously but not literally.

9:54But certainly some of the policies that he's outlined look like they could be destabilizing the markets. Yes, I agree. tariffs and tax cuts in theory should be inflationary. A really aggressive clampdown on immigration would starve the US of a cheap source of labor that has really helped to hold down inflation over the past couple of years. Yes, that is definitely true. But again, you know, he promised us a wall and we got kind of like an overturned sofa on one small section of the border last time around. Right. Right. So so I'm just I just argue with the principle that you can know what would happen before we even get into the topic of who controls the House and the Senate.

10:37So very hard to predict. But I think you sort of have to plan for those outcomes. You have to plan for inflationary outcomes. But of course, that might be true in a Biden victory as well. So I think I'm going to stamp my foot yet again and say trying to earn what they call geopolitical alpha, meaning outsmarting the polls and the markets and betting that they are wrong about the probability distribution of outcomes, it's not a very good way to make money. Or I don't know of people who have made a ton of money that way. Maybe there are a few incredibly clever people working in macro hedge funds who have some deep insight.

11:21But I haven't met those people and I haven't heard them talk and listen to them turn out to be correct. This is turning into a very nihilistic show. I didn't mean that coming out here, but that's where we are. Just kind of grounding it back to markets a little bit, how convinced are you by the argument that the Federal Reserve will be pushed away from pulling down interest rates too close to the election because it doesn't want to look like it's interfering in politics. You know, if you listen to Fed speakers, they will say, look, we don't care about this stuff. We look through it. We are data dependent.

11:53We do whatever the data tells us to do. Do you really think so? Or do you think that they would shy away from jiggling rates around right before an election? I always frame this in terms of reputational risk. I think Jay Powell and the other members of the Monetary Policy Committee have their eye on their legacy, right? They are not in this for the money. They are in it for the importance of the job and for their names to echo through history. If they don't do the right thing, especially if that leads to inflation re-accelerating, they are really going to look bad in the eyes of history. I would think that is the thing that they're worried about most rather than this president, that president.

12:44They're super uptight about that. Yeah. So maybe at the margin, right, maybe if it's a very close call one way or the other, maybe they would flip one way or the other at the margin. But I just don't see psychologically how their incentives are set up that they would have a serious fiddle with that stuff. But, you know, maybe if they did cut rates too soon before the vote, they could be accused of interference in the favor of one candidate or another. I don't know. But if the economy is tanking, right, before the vote, then what are people going to say? You know, hold rates high in order to be impartial.

13:24That's not going to look great, is it? No, no. But look, we've said it before and we've said it again. No, thank you. Would not like to be Fed chair. I'm woefully underqualified for the job anyway, but nonetheless, no thanks. As a kind of way to wrap up our conversation, I think it's important to note that if you look back over big geopolitical events over history, it's surprising the large number of them that didn't affect markets and specifically stock markets all that much. The 9-11 attacks didn't move markets all that much. The major wars of the 20th century, There doesn't seem to be a clear pattern in what wars mean for markets and so forth.

14:06The thing is, politics, it doesn't matter until it does. You look at the Brexit referendum in 2016. That was a long night in the office. I remember it very clearly. That was a real humdinger for UK markets. Yes. So, gun to your head, you've got to choose. In the event that Trump gets in in the next election, then what? What happens to stocks? Stocks go up. I have a very simple reason for believing this. It's what happened last time. Cool. And the reason it happened last time. You said right at the top of this conversation, Rob Armstrong, while you were telling us that you were running for president, that these things are not tradable.

14:45Well, it's not tradable because you don't know whether Trump is going to win. Right. But it's not that we don't know what the outcome will look like if he does win. It's that the probability that he will win is already priced in. So now you've put me in the situation he does win. Stocks go up because he will promise tax cuts, whether he will deliver or not. And investors love them some tax cuts. We know this from experience. So a bump upward for U.S. stocks is probably in the cards. Bonds, much less clear. And I would say we probably get a sideways bond market after that. Now I'll put a question to you, Katie.

15:28Oh, no. What happens to markets in the rest of the world when Trump gets in? Oh, that's a hard question. Depends whether he's serious about pulling out of NATO. Exactly. So, you know, Taiwanese stocks or Eastern European companies or so forth. These are gnarlier questions. It's uncomfortable territory, isn't it, where you know that something big could happen, but you don't know what it is. you just know when it will be. So, you know, we've seen from Mexico and we've seen from India that the elections can shake markets up. But it's just, it just feels like a mugs game to try and get ahead of these things.

16:08For the sake of completeness, I should say that if Biden's reelected, I don't see that being a big negative for stocks either. No. I mean, it's more of the same. While he's been president, the stock market has gone up. So, you know, I'm not saying any, there's a very clear causal connection there. I'm just saying that's how the two things come together. And I would expect it would not be a negative. Okay, so let me ask you another question then, Rob Armstrong. Yes. In the event that your bid to become US president is successful, then what will stocks do? To the moon, Katie. To the moon. Rocket, rocket, rocket.

16:48Well, I look forward to that. In the meantime, we'll be back in a sec with Long Short.

17:03Okay, now it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. Rob, what you got? I am short stock-based compensation. Oh. This is one of my personal hobby horses, and I was reminded of it recently because Salesforce reported a bad outlook at their last quarterly earnings, and the stock went down something like 20%. And beneath the surface of this bad outlook was a company that is spending a huge amount of cash buying back shares just to keep its share count flat, just to prevent dilution of its shareholders. And the reason that that is true is that for decades, they've been giving all these share options to employees.

17:58and now it's time to pay the piper in cash because all those options are vesting and they need to buy back a zillion shares just to keep the share count flat so it is wall street practice with young growing tech companies to ignore stock-based compensation to pretend that it's not something that's happening that is a bad idea people should stop doing it and i'm against it When I am president, this is one of the things. When I am president, this nonsense is coming to an end.

18:35Well, when I'm in charge, I am going to defeat my mortal enemy that I'm short of this week, and that is slugs. I bang on about gardening quite a lot. Oh, I thought this was like one of these Wall Street acronyms, like S-L-U-G or something. But you're talking about the actual, I don't even, is a slug a bug? It's a bug, right? Like slugs and snails. Oh. They're disgusting. They brought the fight to me. They've been eating my tomato seedlings. I am desperately trying to defeat them. I can't find a way to do it. Well, what I did, I had a bad, in my last garden, not the house I live in now, but I had a terrible slug problem.

19:11And I would do the old thing where you put out the little bowl of beer. And slugs love beer and they fall in the beer and they drown and die in what I can only assume is a very, very happy death. That's a bit mean. It's a bit mean. And maybe like what I slightly worry about with it is our slugs coming from the neck, they're like next door. They're like, oh, next door they have beer, you know? So you're like attracting more slugs than you're killing. But I just want them to stay next door or to go into some sort of pot so that I can throw them over the fence next door. He doesn't mind my neighbor, but like.

19:48They are horrible and I'm against them. I join you in this short. We are in agreement on this one. And listeners, if you do have good slug deterrent tactics, hopefully not involving like salting them or drowning them in beer, then let me know, katie.martin at ft.com. We are going to be back in your feed in a couple of days. In the meantime, Rob, pleasure doing business with you. Talk to you again soon. Cheers. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhears. Cheryl Brumley is the FT's global head of audio.

20:26Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

20:57We'll be right back.