Wednesday’s selloff on the Nasdaq, particularly in semiconductor stocks, added a relatively new concern to an unexpectedly special year for stocks: political risk. I am not talking about the outcome of the 2024 presidential election per se, but the risk of a trial balloon months before the election. Two pieces of news shook chip stocks on Wednesday: The Biden administration is reportedly considering tighter restrictions on chip sales to China. Meanwhile, former President Trump said in an interview that his government would require Taiwan to pay the United States to protect it from potential aggression by China. If that turns out to be the case, leaving Taiwan unprotected could lead to China taking control of the island nation and its computer chip business, while further restrictions from the Biden administration could increase the risk of a tit-for-tat trade war between the United States and the United States. this key area. The geopolitical and economic fallout from the two reports sent the Nasdaq reeling, suffering its biggest one-day drop in more than two years. We’ve already heard about some potential policy options that a Biden or Trump administration might pursue starting in 2025. Devalued corporate taxes. This could lead to increased volatility in financial markets, a factor that is conspicuously absent in 2024. , the situation is like this. The economy appears to be growing at about 2% a year, inflation continues to slide toward the Fed’s 2% target, and the stock market is at or near all-time highs. I have to admit, the stock market is doing much better than I expected and will be up more than last year. The third year of a so-called “presidential cycle” is typically the strongest of the four years, but if current patterns continue, stocks will do even better this year. The United States remains the world’s strongest major economy, has the lowest inflation, and its stock market is one of the best-performing in the world. I suspect this will remain the case for the rest of the year, but I also expect the road ahead to be bumpier. Time to do some homework Once the inauguration arrives on January 20, 2025, it will be nearly impossible to predict which policies of the next administration will actually be implemented. But between now and November 5, expect to see more and more leaks about economic and geopolitical proposals that are likely to move markets. Some may never see the light, depending not only on the outcome of the presidential election but also on the makeup of the next Congress. Future regulatory regimes are likely to be very different, affecting individual market sectors more than the market as a whole. Given the huge developments ahead in 2023 and 2024, it would be wise to sharpen your pencils, if you will, and pay attention to the expected changes in Washington’s upcoming policy proposals, even more so than its divisive politics. Which sectors are likely to benefit and which are likely to suffer may be a better question for investors than some of the broader issues being hotly debated by the political class. Under the most normal circumstances — and where normalcy often exists — the first year of a presidential cycle tends to be a tumultuous one. But the contrast between the policies of the parties in this election is extremely stark, arguably more so than at any time in modern memory. While many are reluctant to pay attention to the political noise four months away from the election, it may be necessary for investors to sift through the noise to find news that could impact their portfolios—whether they are involved in politics or not. ‘Tis the season to experiment with balloons. It’s best not to let any of them burst your stock market bubble.
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