A Most Unusual Election Season

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Key points

  • Market volatility is unusually low, and we see it moving higher as the Nov. 8 U.S. presidential election approaches.
  • A strong July U.S. jobs report sent Treasury yields higher and made a December Federal Reserve (Fed) rate hike more likely.
  • An additional U.S. employment survey known as the JOLTS report this week could point to further U.S. jobs market strength.

This U.S. presidential election season is unusual, with unpopular candidates, vast policy differences and equity market volatility at historically low levels. We see volatility moving higher as the Nov. 8 election approaches.

Equity markets tend to react more to macroeconomic factors and corporate earnings than elections, but volatility typically picks up ahead of U.S. elections. We see this trend repeating itself this year, as the chart above shows how volatility has been unusually low (green line).

Markets in the run-up and beyond

Democratic presidential nominee Hillary Clinton has been leading the polls, and betting markets point to a solid Clinton victory. The UK's vote to leave the European Union, however, showed such predictors can be wrong. If Republican nominee Donald Trump's poll numbers improve, we could see the uncertainty surrounding his future policies putting downward pressure on risk assets such as equities. It could also trigger a near-term flight to U.S. Treasuries.

Yet Treasury strength could be limited. Both candidates have campaigned on increased fiscal spending on infrastructure, which would result in increased Treasury issuance. We could see this nudging up Treasury yields and supporting the U.S. dollar. Gold may be a better hedge against sell-offs of risk assets in the short run.

Investors have tended to pull money from U.S. equity funds in the month before Election Day in the past four presidential elections, EPFR Global data show. Market volatility usually subsides after elections. We could see positive sentiment toward emerging market (EM) assets wane in the long run if this year's anti-trade rhetoric increases, but for now we like EM debt due to economic green shoots and investor appetite for income in a world starved for yield.

  • July U.S. payroll growth beat expectations. The Fed likely will want to see more robust data before raising rates. A December hike looks more likely than a September one.
  • The Bank of England cut rates for the first time since 2009 and restarted asset purchases to fight economic weakness. Gilt yields moved lower and the pound weakened.
  • Japanese Prime Minister Shinzo Abe gained cabinet approval for a fiscal stimulus package that failed to meet markets' high expectations.

Global snapshot

Weekly and 12-month performance of selected assets

Equities Week YTD 12 Months Div. Yield
U.S. Large Caps 0.4% 6.8% 4.0% 2.1%
U.S. Small Caps 1.0% 9.4% 1.5% 1.4%
Non-U.S. World -0.7% 3.2% -5.9% 3.2%
Non-U.S. Developed -1.4% -0.9% -8.7% 3.4%
Japan -2.3% -1.7% -5.0% 2.5%
Emerging 1.4% 13.4% 1.7% 2.6%
Asia Ex Japan 1.4% 8.6% 0.6% 2.6%

Bonds Week YTD 12 Months Yield
U.S. Treasuries -0.7% 5.1% 5.3% 1.6%
U.S. TIPS -0.7% 6.4% 5.1% 1.6%
U.S. Investment Grade -0.8% 8.4% 8.3% 2.9%
U.S. High Yield 0.4% 12.4% 5.5% 6.7%
U.S. Municipals -0.1% 4.3% 6.9% 1.6%
Non-U.S. Developed -0.7% 12.1% 13.2% 0.5%
Emerging Market $ Bonds 0.5% 12.9% 12.1% 5.1%

Commodities Week YTD 12 Months Level
Brent Crude Oil 4.3% 18.8% -10.7% $44.27
Gold -1.1% 25.9% 23.1% $1,336
Copper -2.8% 1.8% -7.5% $4,789

Currencies Week YTD 12 Months Level
Euro/USD -0.8% 2.1% 1.7% 1.11
USD/Yen -0.2% -15.3% -18.5% 101.82
Pound/USD -1.2% -11.3% -16.2% 1.31

Source: Bloomberg. As of August 5, 2016. Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Barclays U.S. Corporate Index; U.S. high yield by the Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Barclays Municipal Bond Index; non-U.S. developed bonds by the Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

This post originally appeared on the BlackRock Blog.