Macro: It’s all about elections and keeping status quo Macro: It’s all about elections and keeping status quo Macro: It’s all about elections and keeping status quo

Macro: It’s all about elections and keeping status quo

Steen Jakobsen

Chief Investment Officer

Summary:  Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.


Elections remain an important theme in 2024 

With the 2024 US election looming, the market seems fixated on this single factor, overshadowing other potential scenarios. While we acknowledged the inherent uncertainty, we anticipated the elections playing a dominant role in Q1, possibly influencing Q2 as well. 

This wasn't about playing the markets, but rather recognising the narrative driving investor sentiment. Central banks, poised to cut rates at any sign of weakness, and politicians eager to spend regardless of fiscal prudence, created an environment ripe for "better-than-expected" data, fuelling election-year optimism. 

An unhealthy amount of debt 

The US government's $3 trillion debt issuance since 2022 yielded only $2.4 trillion in nominal GDP growth, yet sustained a perception of positive economic data. While this strategy did prevent an official recession, it did not translate into sound, long-term growth or economic expansion. 

Further contributing to this perception was the significant drawdown of the Fed's Reverse Repo Facility (RRF), basically a government ATM. Think of this facility as a temporary "parking lot" for excess cash. The Fed absorbs this cash by selling securities with the promise to buy them back later. When this cash leaves the facility and re-enters the banking system, it gets multiplied through lending and leverage, essentially greasing the wheels of the economy. 

The RRF peaked at $2.5 trillion in early 2023, but has since shrunk to under $500 billion. This has injected a whopping $2 trillion of fresh liquidity into the US financial system, underpinning animal spirits in stocks and causing crypto currencies to hit new highs. 

Are markets acknowledging the liquidity risks? 

Beneath the surface, however, a different story unfolds. The excessive money printing and circulation, intended to stimulate risk-taking, coincided with the October market low in S&P 500. The significant decrease in outstanding RRF balances and the Fed’s perceived pivot to cutting policy rates sent equities in a straight line upwards from late October 2023. At the current pace the RRF balance will be depleted by June, removing its stimulative effect.   

Furthermore, global central banks are collectively reducing overall liquidity in Q2. We anticipate the consequences of accumulated debt, high real-interest rates, non-productive green sector investments, refinancing needs of small and medium banks, and the commercial real estate overhang to collectively slow economic growth in the immediate future. 

The market's initial over-optimism regarding rate cuts has waned, with a growing acceptance of the Fed's projections. Other parts of the market have, however, gone the other way, predicting no cuts in 2024. We still believe rate cuts are likely, acknowledging the slow pace of change compared to market expectations. Remember, the market often struggles to process complex information effectively. 

Investment allocation 

Our investment strategy throughout Q1 involved a balanced allocation of 25% each to the 4 key asset classes: equities, fixed income, commodities, and cash/alternatives. This diversification has served us well, but as we transition into Q2, we are adjusting our allocation by reducing equity exposure over valuation concerns. 

While we acknowledge the potential influence of the 2024 elections, maybe it’s time to follow the late American investment banker J. P. Morgan’s famous reply when he was asked how he had become the world’s richest man: “I made a fortune getting out too soon”. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.