The CEO Macro Briefing Book

Economic strength through a volatile political season

28 Oct 2024

Authors

Jason Draho Paul Hsiao

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UBS Trending: How are CEOs and investors reacting to the market?

As the US election draws nearer and more rate cuts by the Fed are expected, we look to business owners and seasoned investors for their reactions. What signals should you be focusing on?

Top of the Morning podcast

We spotlight the latest edition of the quarterly UBS CEO Macro Briefing book as we explore how business owners and investors feel about the upcoming US election, the state of the US economy, the course ahead for Fed monetary policy, and more. Featured is Paul Hsiao, Asset Allocation Strategist Americas, UBS Chief Investment Office. Host: Daniel Cassidy

Insights in brief

Executive Summary: Economic strength in a volatile political season

Macroeconomic outlook

A good growth backdrop... Better-than-expected growth data, particularly from hiring and retail sales, has lifted Q3 GDP estimates over 3%, another quarter of above-trend growth. We expect growth will be sustained at a good pace, especially if real incomes continue to grow, while downsides risks appear lower.
…complicate the trajectory of rate cuts. Although we still forecast 50bps of rate cuts in Q4, the bar is not high for the Fed to skip a meeting if the labor market data shows no further weakness, and inflation surprises to the upside. While the pace of rate cuts may slow, we still expect the Fed to cut rates to ~3.5%.

Operating environment

Data revisions bolster assessment of consumers and labor market. Revised income data indicate that consumers are in better shape than assumed, making the recent robust spending appear sustainable. While the labor market continues to broadly cool, wages remain elevated, driving real income growth.
Financing conditions return to historical norms while challenges remain for real estate. Financial conditions are accommodative compared to historical standards, as borrowing costs decrease and banks loosen credit standards while real estate market continues to face supply and financing challenges.

Markets & deal activity

Good macro has lifted equities, but that strength and election uncertainty is fueling rate volatility. Large rotations below the surface (e.g., cyclicals vs. defensives) are likely continue as the macro narrative evolves. Rates will stay choppy until election and Fed uncertainty is resolved, but they’re still likely to decline.
Despite rate cuts, deal activity falls short of expectations. Hopes for a sharp revival in deal-making with the start of rate cuts have proven premature. M&A activity remains sluggish, and the lack of exits continues to hinder private equity. IPO activity is modestly improving and should increase once uncertainty subsides.

Politics

The race has tightened, and UBS CIO puts even odds-on Trump and Harris. While the odds are evenly split between the two candidates, a Trump victory is likely to be accompanied by a Red Sweep, given the composition of Senate races this year. Conversely, a Harris victory would likely result in a divided government.
Best not to mix politics with portfolios. A UBS InvestorWatch survey found significant anxiety among investors and business owners about the election. History shows that elections serve as a “risk clearing” event for equities, with performance driven more by macro and financial conditions than by election outcomes.