Transcript: What elections mean for markets this year

This is an audio transcript of the Unhedged podcast episode: ‘What elections mean for markets this year’

Katie Martin
The big risk everyone said for 2024 is this pesky thing called democracy.

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We’ve got elections all across the globe this year, and now we’re really starting to see the effect on markets. We had elections in Mexico which have hammered the peso. In India, it’s been a real rollercoaster. Coming up, we’ve got the UK and our bigger cousin, the US. So in today’s podcast, we wade into the hostile waters of politics and ask: can you trade elections? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m markets columnist Katie Martin and I’m joined by Robert Armstrong, the man behind the Unhedged newsletter.

Robert Armstrong
Katie, I’ve chosen this venue and this moment to announce that I am running for president of the United States. And let me tell you my platform, Katie.

Katie Martin
Cool. Yeah, yeah.

Robert Armstrong
The Armstrong platform is when it comes to politics, you cannot outsmart the markets. There is no geopolitical alpha, folks.

Katie Martin
Is this a winning platform? I don’t know that anyone’s gonna vote for you, Rob. This could be bad for you.

Robert Armstrong
I’m really good on TV, Katie.

Katie Martin
(Laughter) Better than on podcasts. I mean, you don’t write about politics.

Robert Armstrong
No, I try to avoid it. I try to avoid it at all costs.

Katie Martin
Up until your previously unknown run for US president. I mean, why is that? I mean, is it because you’re in roughly the same camp as I am, which is ignore politics, markets do their own thing anyway?

Robert Armstrong
Point number one is it’s very hard to predict how markets are going to respond to political changes. And the reason that’s true is not because markets don’t respond to politics. It’s actually because they incorporate political information quite quickly and quite easily. In other words, markets are about as smart about the economic consequences of elections as it’s possible to be. The information that is available is kind of very often in the price to begin with. And if there is a big bit of political news and markets do move, it’s because there was a genuine surprise that might have been difficult or even impossible to anticipate.

Katie Martin
Let me tell you about some of those surprises, Robert Armstrong. So first of all, we had elections the other day in Mexico. We have a new president in the form of Claudia Sheinbaum, the country’s first female president. Now, I don’t think it’s because she’s the first female president but markets no likey. Mexican peso’s off pretty hard — 3 per cent or so. Stocks took a 6 per cent hit on the first day after the vote. I mean, to your mind, Rob, why is it that markets dislike this lady so much?

Robert Armstrong
According to the Financial Times, she won with a greater majority than expected, which means that she and her party, which was the ruling party before, might now be able to have a little fiddle with the constitution. And if there’s one thing markets don’t like is people running around changing the rules. This is a slight exaggeration on my part, but I think that’s basically the story. Can they change the way judges are elected? There’s something in there about the minimum wage, inflation adjustment that they could change, et cetera, et cetera. So people are worried about institutional change driven by a big majority.

Katie Martin
Yeah. But the market really didn’t see this one coming. They saw her coming, but they didn’t see quite the scale of the victory. And then just like a day or so later, India is a really tricky one to get your head around. So first of all, we had the exit polls saying current Prime Minister Narendra Modi — you know, he is Indian politics. He has been Indian politics for such a long time, for years and years. The exit polls said he was gonna be back as prime minister and his party’s gonna have a majority and stocks hit a record high. Hooray!

But wait. Later we started to get the results actually come through and it said he was gonna have a diminished mandate. And so stocks did an absolute reverse ferret, went totally the other way, particularly stocks related to Gautam Adani, who’s a close associate of Narendra Modi.

Robert Armstrong
And a beneficiary of his big infrastructure programmes.

Katie Martin
Exactly. And then just when you think you got that kind of, you know, in hand, now it looks like he might actually or his party might actually lose the majority. And so all bets are off here. And this is absolutely not what markets were expecting.

Robert Armstrong
No. And again, markets no likey. But almost for the opposite reason of Mexico, he got a smaller majority than expected, perhaps no majority at all. And that has sent markets down. And a lot of this of course comes down to context. India has been the best-performing stock market in the world for quite a while now and Modi is seen as an unapologetically friendly person towards the Indian business establishment. So that is big news, market-moving news. The question is: could a really clever person have anticipated these outcomes, traded them and made money?

Katie Martin
Do you know any clever people?

Robert Armstrong
No. They’re certainly not on this podcast so we’ll just have to pretend one is sitting here with us. (Katie laughs) But one thing we can say with some certainty is that there’s a lot of people who will sell you their services in . . . 

Katie Martin
Say, “I know what’s going to happen”.

Robert Armstrong
They live in Washington or London or New Delhi and they will tell you that they have special insight into the political outcomes that are coming down the pike. And for a small fee, they will help you trade them.

Katie Martin
You can pay me some money for this insight if you want, but I’m here to tell you that it looks like Labour are going to win the next UK election.

Robert Armstrong
Yes. You heard it here first, folks.

Katie Martin
The polls are certainly swinging extremely strongly in Labour’s favour. Look, there’s a month to go. Anything can happen. But I can’t think what that thing would be. You know, it looks pretty much baked in and the markets don’t care at all. My take on why the markets don’t care at all is that this has kind of been a pretty well-anticipated potential outcome for a very long time, and if anything, there would be more of a potential hit to markets if it looked like the Conservative party was gonna get back in again on the basis that the last time they had a free rein over economic policy, we got Liz Truss.

So, you know, so markets are incredibly relaxed, like much more relaxed than I’ve seen them in the past about the potential for a Labour victory on July the 4th. So yes, you can buy that political consultancy advice from me if you like. But what I can’t tell you is who’s going to win the US presidential election.

Robert Armstrong
I can’t tell you that either. The Armstrong theory of what you can know about US elections is very simple. Your best guess is that the polls, and specifically the polls in the swing states or the averages of polls of the swing states, are about as smart as you can be. And they have a, you know, a meaty margin of error on either side, but sitting around trying to outwit the polls by saying things like, well, there’s shy Republicans who don’t wanna tell the pollster and therefore all muddled up, or there’s, now there’s shy Democrats or nani-nani and all this and that. Those efforts to outwit the polls, in my experience, have not gone particularly well. So what do the polls say? The polls say that Donald Trump is ahead in the crucial swing states and therefore we have to bet that he is going to be the next president.

Katie Martin
Everyone said last time Trump won this election, well, if he wins, stocks are gonna tank. (Makes buzzer sound) Totally wrong. So people are a little bit reluctant, I think, to kind of really be prescriptive about what will happen if Trump wins again. But what’s your guess?

Robert Armstrong
Before we get to my guess, let’s talk about some guesses other people are making. There is a popular view afoot in the American media that a Trump election will be inflationary. So he will increase the deficit and the debt by cutting taxes again. He will impose harsh tariffs which are, according to some, inflationary. And then he will elect some incredible toady, Gollum-like figure to head the Federal Reserve who will do exactly what he wants. And between the . . . 

Katie Martin
Has he approached you yet for this for this job or . . .?

Robert Armstrong
(Laughter) If my presidential run doesn’t work, I will make myself available to be Donald Trump’s FOMC chair and Fed chair. So, you know, I think this theory kind of makes sense on its face, but, I don’t like predicting elections.

You know what I like predicting even less? Donald Trump’s behaviour. You know, he’s a cagey political operator who follows the winds of public opinion quite carefully and quite astutely. And I’m not gonna run around predicting what he’s going to do on day one because it will be changeable.

Katie Martin
So I lose track of whether we’re supposed to be taking him literally but not seriously, seriously but not literally, but certainly some of the policies that he’s outlined look like they could be destabilising to markets.

Robert Armstrong
Yes, I agree. Tariffs and tax cuts, in theory, should be inflationary.

Katie Martin
A really aggressive clampdown on immigration would starve the US of a cheap source of labour . . . 

Robert Armstrong
Of labour.

Katie Martin
 . . . that has really helped to hold down inflation over the past couple of years.

Robert Armstrong
Yes, that is definitely true. But again, you know, he promised us a wall and we got kind of like an overturned sofa on one small section of the border last time around, right? So I just argue with the principle that you can know what would happen before we even get into the topic of who controls the House and the Senate. So very hard to predict, but I think you sort of have to plan for those outcomes. You have to plan for inflationary outcomes. But of course that might be true in a Biden victory as well.

So I think I’m gonna stamp my foot yet again and say trying to earn what they call geopolitical alpha, meaning outsmarting the polls and the markets and betting that they are wrong about the probability distribution of outcomes, it’s not a very good way to make money, or I don’t know of people who have made a tonne of money that way. Maybe there are a few incredibly clever people working in macro hedge funds who have some deep insight, but I haven’t met those people, and I haven’t heard them talk and listen to them turn out to be correct. This is turning into a very nihilistic show and I, you know, I didn’t mean that coming out here, but that’s where we are.

Katie Martin
Just kind of grounding it back to markets a little bit, how convinced are you by the argument that the Federal Reserve will be pushed away from pulling down interest rates too close to the election, because it doesn’t want to look like it’s interfering in politics? You know, if you listen to Fed speakers, they will say, look, we don’t care about this stuff. We look through it. We are data dependent. We do whatever the data tells us to do. Do you really think so? Or do you think that they would shy away from jiggling rates around right before an election?

Robert Armstrong
I always frame this in terms of reputational risk. I think Jay Powell and the other members of the Monetary Policy Committee have their eye on their legacy, right? They are not in this for the money. They are in it for the importance of the job and for their names to echo through history. If they don’t do the right thing, especially if that leads to inflation re-accelerating, they are really going to look bad in the eyes of history. I would think that is the thing that they’re worried about most rather than this president, that president.

Katie Martin
They’re super uptight about that.

Robert Armstrong
Yeah. So maybe at the margin, right, maybe if it’s a very close call, one way or the other, maybe they would flip one way or the other at the margin. But I just don’t see psychologically how their incentives are set up that they would have a serious fiddle with that stuff.

Katie Martin
But, you know, maybe if they did cut rates too soon before the vote, they could be accused of interference in favour of one candidate or another. I don’t know.

Robert Armstrong
But if the economy’s tanking, right, before the vote then what are people gonna say? You know, hold rates high in order to be impartial? That’s not gonna look great, is it? (Laughter)

Katie Martin
No, no. But look, we’ve said it before and we’ve said it again. No, thank you. Would not like to be Fed chair. I’m woefully underqualified for the job anyway, but nonetheless, no thanks.

Robert Armstrong
As a kind of way to wrap up our conversation, I think it’s important to note that if you look back over big geopolitical events over history, it’s surprising the large number of them that didn’t affect markets and specifically stock markets all that much. The 9/11 attacks didn’t move markets all that much. The major wars of the 20th century — there doesn’t seem to be a clear pattern in what wars mean for markets and so forth.

Katie Martin
The thing is, politics like it doesn’t matter until it does. Look at the Brexit referendum in 2016. That was a long night in the office. I remember it very clearly. That was a real humdinger for UK markets. So, gun to your head. You’ve gotta choose in the event that Trump gets in in the next election, then what? What happens to stocks?

Robert Armstrong
Stocks go up. I have a very simple reason for believing this. It’s what happened last time.

Katie Martin
Cool.

Robert Armstrong
And the reason it happened last time . . . (Laughter)

Katie Martin
You said right at the top of this conversation, Rob Armstrong, while you were telling us that you were running for president, that these things are not tradeable.

Robert Armstrong
Well, it’s not tradeable because you don’t know whether Trump is going to win, right? But it’s not that we don’t know what the outcome will look like if he does win, it’s that the probability that he will win is already priced in. So now you’ve put me in the situation where he does win. Stocks go up because he will promise tax cuts whether he will deliver or not. And investors love them some tax cuts. We know this from experience. So a bump upward for US stocks is probably in the cards. Bonds, much less clear. And I would say we probably get a sideways bond market after that. Now I’ll put a question to you, Katie.

Katie Martin
Oh, no.

Robert Armstrong
What happens to markets in the rest of the world when Trump gets in?

Katie Martin
Oh, that’s a hard question. Depends whether he’s serious about pulling out of Nato. (Inaudible)

Robert Armstrong
Exactly. So, you know, Taiwanese stocks or eastern European companies or so forth. These are gnarlier questions.

Katie Martin
It’s uncomfortable territory, isn’t it, where you know that something big could happen, but you don’t know what it is. You just know when it will be. So, you know, we’ve seen from Mexico and we’ve seen from India that elections can shake markets up. But it’s just, it just feels like a mug’s game to try and get ahead of these things. For the sake of completeness, I should say that if Biden’s re-elected, I don’t see that being a big negative for stocks either.

Robert Armstrong
No, I mean, it’s more of the same. While he’s been president the stock market has gone up. So . . . 

Katie Martin
Yeah, exactly.

Robert Armstrong
You know, I’m not saying any . . . There’s a very clear causal connection there. I’m just saying that’s how the two things have come together, and I would expect it would not be a negative.

Katie Martin
OK, so let me ask you another question, then, Rob Armstrong. In the event that your bid to become US president is successful, then what will stocks do?

Robert Armstrong
(Laughter) To the moon, Katie. To the moon.

Katie Martin
Rocket, rocket, rocket.

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Well, I look forward to that. In the meantime, we’ll be back in a sec with Long/Short.

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OK, now it’s time for Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Rob, what you got?

Robert Armstrong
I am short stock-based compensation. This is one of my personal hobby horses and I was reminded of it recently because Salesforce reported a bad outlook at their last quarterly earnings. And the stock went down something like 20 per cent. And beneath the surface of this bad outlook was a company that is spending a huge amount of cash buying back shares just to keep its share count flat just to prevent dilution of its shareholders. And the reason that is true is that for decades they’ve been giving all these share options to employees. And now it’s time to pay the piper in cash because all those options are vesting and they need to buy back a zillion shares just to keep the share count flat.

So it is Wall Street practice with young, growing tech companies to ignore stock-based compensation, to pretend that it’s not something that’s happening. That is a bad idea. People should stop doing it. And I’m against it.

Katie Martin
And so help you, when you’re president this is one of the things . . . 

Robert Armstrong
When I am president, this nonsense is coming to an end.

Katie Martin
(Laughter) Well, when I’m in charge, I am going to defeat my mortal enemy that I’m short of this week, and that is slugs. I bang on about gardening quite a lot.

Robert Armstrong
Oh, I thought this was like one of these Wall Street acronyms, like S-L-U-G or something. But you’re talking about the actual, I don’t even know. Is a slug a bug? It’s a bug, right?

Katie Martin
Like, slugs and snails.

Robert Armstrong
Ugh. They’re disgusting.

Katie Martin
They brought the fight to me. They’ve been eating my tomato seedlings. I am desperately trying to defeat them. I can’t find a way to do it.

Robert Armstrong
Well, what I did, I had a bad . . . In my last garden — not the house I live in now — but I had a terrible slug problem. And I would do the old thing where you put out a little bowl of beer. And slugs love beer, and they fall in the beer and they drown and die in what I can only assume is a very, very happy death.

Katie Martin
That’s a bit mean.

Robert Armstrong
It’s a bit mean and maybe like what I slightly worry about with it is, are slugs coming from the like, next door they’re like, oh, next door they have beer, you know, so you’re like attracting more slugs than you’re killing, but . . . 

Katie Martin
But I just want them to stay next door or to go into some sort of pot so that I can throw them over the fence next door. He doesn’t mind, my neighbour, but like . . . 

Robert Armstrong
(Laughter) They are horrible and I’m against them. I join you in this short.

Katie Martin
We are in agreement on this one. Listeners, if you do have good slug deterrent tactics, hopefully not involving like salting them or drowning them in beer, then let me know: katie.martin@ft.com.

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We are gonna be back in your feed in a couple of days. In the meantime, Rob, pleasure doing business with you. Talk to you again soon.

Robert Armstrong
Cheers.

Katie Martin
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Katie Martin. Thanks for listening.

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