The selloff in the Nasdaq on Wednesday, more specifically in semiconductor stocks, has added a relatively new wrinkle to what has been an unexpectedly exceptional year for stocks: political risk. And by that I do not mean the outcome of the 2024 presidential election , per se, but the risk of trial balloons being floated for the next several months leading up to the election. Two news items on Wednesday rocked chip stocks: The Biden administration is reportedly considering much tighter constraints on chip sales to China . Former President Donald Trump , meanwhile, in an interview, suggested his administration would require Taiwan to pay the U.S. to defend it from potential Chinese aggression. An unprotected Taiwan, if that is the outcome, could lead to China gaining control of the island nation and its computer chip business, while further restrictions from the Biden administration could raise the risk of a tit-for-tat trade war between the U.S. and China in this critical sector of the global economy. The geopolitical and economic consequences of both reports knocked the Nasdaq for a loop , suffering its biggest one-day loss in over two years. Competing proposals We’ve already heard of some of the potential policy prescriptions that either a Biden or Trump administration might pursue beginning in 2025. From raising capital gains taxes and taxing unrealized capital gains as Democrats are suggesting, to cutting corporate taxes further and devaluing the dollar to boost exports in a Trump administration, each candidate’s platform will get increasing scrutiny as the election draws near. That could lead to increased volatility in financial markets, a factor that has been notably absent in 2024. Early this year, I expected 2024 to be an “abnormally normal” year when it came to both the economy and financial markets, and so far that’s been largely true. The economy appears to be growing at a roughly 2% annual pace, the rate of inflation continues to slide back toward the Federal Reserve’s 2% target, while stocks are sitting at or near record highs . I must admit that the stock market is doing far better than I had anticipated and is on pace to rise more than it did last year. The third year of the so-called “presidential cycle,” is typically the strongest of the four but this year stocks are set up, if current patterns persist, to perform even better. The U.S. remains the strongest major economy in the world with the lowest inflation rate while its equity market is among the best performers on the planet. I suspect that will remain true for the rest of the year, but I also expect it will be a much bumpier road going forward. Time to do some homework It’s nearly impossible to predict which policies of the next administration will actually be implemented once the inauguration on Jan. 20, 2025, comes around. But between now and Nov. 5, expect to see more and more leaks about economic and geopolitical proposals that may well move markets. Some may never see the light of day depending, not only on the outcome of the presidential election, but also on the composition of the next Congress. Regulatory regimes in the next terms could be wildly different, affecting individual market sectors more than the markets overall. Given the sizable gains in 2023 and 2024, it would be wise to sharpen one’s pencil, if you will, and take note of prospective shifts in Washington’s coming policy proposals, even more than its divisive politics. Which sectors may benefit versus which may suffer may well be a better question for investors to ask than some of the broader questions being hotly debated by the political class. The first year of a presidential cycle is often a tumultuous one, under the most normal circumstances — to the extent normal circumstances frequently exist. But there are extremely sharp contrasts between the parties’ policies in this election, arguably more so than at any time in modern memory. While many prefer not to pay attention to political noise four months away from an election, it would likely behoove investors to sift through the noise to find the news that may well affect their portfolios — whether they are politically engaged or not. ‘Tis the season of trial balloons. It’s probably best not to let any of them burst your stock market bubble.
