Recession Risks and Election Risks Weigh on Financial Markets

Equity markets are under pressure from the recession, higher taxes, and increased uncertainty about the outcome of the 2024 US presidential election.

Economic Data Reveals Risks of Recession

There were two negative economic indicators last week: the ISM Manufacturing Index and the unemployment rate.

After the July 31 Fed policy decision that leaves interest rates unchanged, the US ISM Manufacturing Index fell dramatically on August 1. The ISM Manufacturing Index is the main indicator of economic activity and growth. Unexpected declines and worsening recessions in July are potential signs of a deep recession or recession.

In addition to the weakening of the ISM, the employment report of August 2 showed that the unemployment rate in July rose to 4.3%, while the number of jobless payments decreased more than the expectations of the Consensus, with an increase in the month and only 114,000 net new nonfarm payrolls. Although the lack of wages was disappointing, many market analysts are concerned about the rise in the unemployment rate to 4.3% in July 2024 from 3.5% in July 2023 as a sign of a possible recession. be present according to Sahm Law.

Sahm’s law states that a rise in the three-month unemployment rate of 0.5% above the previous 12-month low is a sign of recession.

Indicators of Solid Economic Information

Despite the weakness of the US ISM and the unemployment rate, many economic data show that the US economy and the labor market are in a solid state. For example, JOLTS data showed job openings of about 8.2 million by June 2024.

US workers also reached a new all-time record in July at 168.4 million. With the labor force at a record high and ongoing weekly jobless claims below 1.9 million, ongoing claims show that only about 1.1% of the US workforce is collecting unemployment benefits, according to the US Department of Labor.

Furthermore, despite a strong increase in wages by only 114,000, total US payrolls rose to a new record high of 158.7 million in July. Finally, the GDP growth outlook remains positive as the Atlanta Fed’s GDPNow for Q3 2024 shows US growth at +2.5% as of August 1.

Recession indicators and solid economic data give different signals about the US economy. Perhaps that is why Fed Chairman Jerome Powell emphasized the Fed’s data reliance and focus on “total information” when making future policy decisions at his press conference on July 31 .

Heightened Political Uncertainty

The worst case for financial markets and the economy after the US presidential election is if it is not immediately clear who the winner is. When this happened in 2000, it was a major cause of the recession in early 2001.

Now that the US presidential election looks close, financial markets have come under pressure as the risk of US political instability rises.

Data from PredictIt.org, an online prediction market that operates “under authorization from the CFTC” as a “test project designed for educational purposes,” shows how how people bet on who will be president, among other things. In mid-July, the percentage chance of Donald Trump being elected president this November rose to 70%.

Things have changed a lot in recent weeks, and now it looks like the election will be very close, adding to the uncertainty of the outcome.

In less than three weeks, Trump’s chances of victory have dropped from a high of 70% on July 15 to an intraday low of 49% on August 4. Meanwhile, Kamala Harris’s chances are elected president is sold until every day. a high of 54% on August 4.

The prospect of an imminent US presidential election worries financial market participants due to the controversial 2020 presidential election and subsequent events on January 6, 2021. Any outcome of the presidential election that is short it is decisive and threatens to cast a long shadow of risk and financial instability. markets until the 2024 US election results are clearly announced.

Risks of High Tax Rates

With the increasing likelihood of a Democratic presidential victory this fall, financial markets may also be pricing in the risks of higher corporate tax rates and higher corporate income tax rates.

Biden’s 2025 tax plan calls for a major increase in the corporate tax rate, raising it to 28% from 21%. The plan also calls for raising income tax rates and other taxes, including raising “the top rate on long-term earnings and qualified dividends to 44.6 percent.”

Financial market participants can expect the future Harris administration to push for similar policies. Therefore, the risk of higher taxes increased as Harris’s winning probability improved.

Recent bear market conditions are about pricing in risk – and the risks of higher corporate tax rates and higher capital gains tax rates are hampering equity valuations. These risks are compounded by the many risks of economic and electoral uncertainty.

Looking Ahead

Economic developments next week are light, making next week’s growth and inflation reports important for policymakers and financial markets. With few economic developments this week, equity markets, the dollar, and bond yields may remain under pressure until next week’s July CPI inflation report.

The July CPI inflation report may show a decrease in annual pressures, and the July PPI may show the lowest annual inflation rate. By reducing annual inflation pressures, dollar and bond yields may come under more pressure. As long as growth rates don’t slow down too much, equity markets can improve with reduced inflationary pressures and heightened expectations of Fed rate cuts.

Moderate monthly declines in next week’s July retail sales and industrial output reports will not change expectations for growth or prospects for a soft landing. However, the sharp decline may be seen as another worrisome sign that the US economy may be struggling.

On the other hand, if expectations of a severe recession, rates may continue to fall next week even if inflationary pressures decrease – especially if the uncertainty of the outcome of the US election remains and up.