Market Watch: The Kamala effect and what investors should expect from the next US President

The past month has seen a seismic shift in the US political landscape. We’ve seen an assassination attempt on the leading presidential candidate and then a greatly revived Democratic Party with the departure of incumbent Joe Biden.

What does it all mean for investors and how could Donald Trump and Kamala Harris respectively shape the investing landscape should they win in November?

“After the assassination attempt the odds for a Trump victory soared,” says Pie Funds chief investment officer Mike Taylor.

“That definitely became the consensus trade and market expectation. However, when Biden stepped out of the race, that raised the odds for the Democrats to come through with a victory.”

At the moment Trump was still the frontrunner and that’s what the market was pricing in, he said.

That implied a scenario where higher tariffs were placed on goods imported into the US tariffs and also more tax cuts.

There was a risk that might mean higher interest rates, Taylor said.

“They’ve got to be careful not to have a bit of a Liz Truss moment in the US, spending on things that they can’t fund effectively, just continuing to blow the deficit out.

“I’m sure that will be a delicate balance if the Republicans are elected.”

For the Democrats the big focus would remain support for investment in “green energy” and renewables, he said.

That was likely to be almost the opposite of what we could expect on energy with Trump.

“I think we can expect both of them to continue with the current set of tariffs that they’ve got. But Trump just to push harder on those. Also, they’ll both be trying to spend as much as markets will allow them to spend,” Taylor said.

Meanwhile, the bigger issue looming over US markets was the prospect of the US Federal Reserve cutting interest rates.

The Federal Reserve said last Thursday that it could start lowering interest rates as soon as September.

“A reduction in our policy rate could be on the table as soon as the next meeting in September,” Fed chair Jerome Powell said while adding that there had been “a real discussion” at the Federal Open Market Committee this week about cutting rates.

Mike Taylor is founder and chief investment officer at Pie Funds. Photo / Supplied

While it wasn’t yet a done deal, the prospect of rate cuts would provide some positive momentum for many stocks that had struggled in the past few years, Taylor said.

Meanwhile, the high-powered tech stocks that had been propping up market returns were seeing some sell-offs.

“The tech industry has propelled the US markets for the last decade and that outperformance relative to the rest of the market is quite significant,” Taylor said.

“So yes, there’s been a small correction, and some small caps and rate sensitive names have rallied. But if you look back out your time horizon to five years or 10 years, there’s a huge gap to close between those two sectors of the market.”

The tech sector had become “a bit frothy” in terms of valuations, he said.

“I think people had become somewhat exuberant, particularly in the case of Nvidia, extrapolating their earnings out for a number of years, when it’s probably not possible as a cyclical business to keep growing at that rate that they have.”

Taylor said he was taking a cautious approach to those big “mega-cap” tech stocks.

“The sentiment has changed, so even positive results won’t necessarily cause big rallies. But the other parts of the markets you know, it’s conceivable that the tide has turned now and with an easing of rates, the rest of the market will outperform the mega-caps going forward”.

Liam Dann is the Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.

The Market Watch video show is produced in partnership with Pie Funds.