Interest rates, inflation, and the US elections – key takeaways for investors

In the recent expert talk “The Big Picture”, Dan Scott, Chief Investment Officer, and Mario Montagnani, Senior Investment Strategist of the Multi Asset Boutique, discussed the implications of the changing macroeconomic environment for investors.

From the US Federal Reserve’s (Fed) rate cut to the US elections, our experts examined how current events are impacting the markets as we approached the final quarter of the year and what the rest of 2024 may hold for investors.  

No time to watch the 30-minute replay? Here are excerpts of the conversation:

Corinne Gretler: What do you think of the Fed’s recent rate cut? Do you agree with other analysts that the big 50 basis point cut is a bad sign? 

Dan Scott: No, I don’t think it’s a bad sign. The Fed is transparent about the data it’s using, and inflation hasn’t been a problem for a while now. In fact, I think the rate cut was overdue. The problem now is the weak labor market, which ultimately made the big cut possible. It was time - that’s supported by both inflation data and historical data.

Corinne Gretler: What is China’s role in all this? And what about deflation?

Dan Scott: The big scare now is not just disinflation but deflation. For instance, we don’t want a downward spiral like we currently have with the Chinese housing crisis. There is a lot of wealth in China, but the Chinese are simply not going to spend if this issue persists.

Mario Montagnani: Let’s think about when the markets were at the peak of inflation in July 2022. Timing that point was crucial, and then all the targets in 2023 were lower than the actual results. I think we see that reflected in the way we started to analyze inflation. Within certain sectors, there’s already deflation, for instance in disruptive tech or in China. And then commodities like oil are flipping to the other side from the spillover last year.

Dan Scott: The only sector where inflation remains is energy, for instance copper. If you look at oil, it has totally collapsed. Since the US is energy independent, we don’t have to worry about that anymore. It’s only housing that remains a bit sticky. Those intricacies mean that we still have some dynamics to watch there. But otherwise, inflation is done and dusted.

Corinne Gretler: What about our long-term overweight in US equities and the upcoming US elections? Was the election a factor in the decision to reduce US equities?

Mario Montagnani: We’ve been overweight for a long time, since September 2022, and this was the right choice. But what we have seen recently is a slowdown in earnings. It’s still good, but there’s less growth than before. And since we have the luxury to take a step back since we’ve been overweight for so long, that’s exactly what we’re doing until the next catalyst arises. And that just might be the US elections in November.

Corinne Gretler: Speaking of the elections: How might each candidate affect the global markets? Can we expect changes in trade policy?

Dan Scott: We’ve listed the companies that Democrats and Republicans consider threatening. The Democrats put more Chinese companies on the list than the Republicans. That might be an indicator. But generally, we expect that nationalism and the preference for domestic supply chains is a long-term structural trend that we have to get used to. It’s generally the same whether it’s Harris or Trump who wins the election. But of course, there would be some differences. I, for instance, believe that Trump would put more pressure on NATO members to contribute to the defense fund than Harris would.

The full conversation in the livestream: