The “year of democracy” holds the potential to bring profound change to global politics, economic policy, and the investment environment. By the end of 2024, more than five dozen countries, accounting for nearly half of the world’s population, will elect new leaders. Elections in Europe, including the UK, France, Germany and European Union, have already yielded both expected and surprising results. The US presidential election in November, as well as key congressional races, also could create significant policy changes—both expected and unexpected—during the next administration, no matter who wins the White House. For investors, the challenge lies in identifying the impact of elections on financial markets. How are 2024’s elections going to change the investment outlook?
This episode of The Outthinking Investor takes a closer look at elections around the world, the issues most important to voters, the challenges that political leaders face, and election season’s potential short- and long-term implications for investors. Our guests are Jeanne Sheehan Zaino, professor of political science and international studies at Iona University and author of “American Democracy in Crisis”; Morris Fiorina, Wendt Family Professor at Stanford University and senior fellow at the Hoover Institution; and Taggart Davis, Vice President of Government Affairs at PGIM.
Episode Transcript
>> Long before there was organized betting for professional sports, there was legal and organized betting on elections. Gamblers might bet significant sums of money on their favorite candidate. Or they might wage a bet designed to humiliate their challenger. In fact, eating crow was one such humiliation, adding insult to injury for whoever lost the bet, quite literally. Betting data for US presidential elections from the 1860s until it was mostly declared illegal in the mid-1900s shows that presidential favorites have typically won their election, with few exceptions. And since the Gallup Poll was created, election forecasts have become even more accurate. One advantage the betting markets had over today's polls is how quickly the odds adjusted to breaking news. On the other hand, that made them susceptible to overreaction. Which takes some time to verify or refute. More importantly, bets reflected the popular vote, not the electoral college, which assigns each state a certain number of votes. This year, analysts and commentators have been watching the polls in the US and abroad. For investors, the key is trying to predict potential impact on markets, sectors, and even companies under different administrations. Are any of this year's elections foreshadowing market or economic conditions to come? Which financial and economic issues should investors pay closer attention to? To understand today's investment landscape, it's important to know how we got here. This is The OUTThinking Investor, a podcast from PGIM that examines the past, the present-day opportunities, and the future possibilities across global capital markets. Jeanne Zaino is professor of Political Science and International Studies at Ioannina University and the author of the book American Democracy in Crisis. Morris Fiorina is the Wendt Family Professor at Stanford University and senior fellow at the Hoover Institution. Taggart Davis is the head of Government Affairs in the EMEA region for PGIM. No two election cycles are identical. But this year's general election in the US is particularly turbulent. That's according to Jeanne Zaino. And she's observed countless elections in the US and around the world.
>> We are living through an election that I think in most of our lifetimes is the most chaotic and surprising event in modern American history. And so what that means is that it is really difficult to make decisions based on some kind of prediction as to what is going to happen. And so anybody who relishes predictability, as people in the market tend to, this is not the election for them from that perspective. There is so much noise out there, that to break through, you have to say things and do things that will shock people.
>> Political discourse in the US seems to have gotten increasingly more negative over the years, making it even more difficult for policymakers to get work done. Morris Fiorina explains.
>> Back in early 2000s, we began to see this narrative that the American population had become split down the middle between liberal and conservative, blue and red, and so forth. And I'd spent by that time 40 years studying public opinion data, and I didn't see it. And I produced a lot of charts showing that basically if you looked at the American electorate in the aggregate, it hadn't changed in 50 years. And why politics had changed was something different that the two political parties had always been a very -- what we call "big tents" basically, very heterogeneous groups. And they had liberals and conservatives in both and we had cross-party coalitions. And what happened was the parties have gradually begun a process of sorting out, which is now becoming really serious. The parties had sorted out so that the Democrats have become increasingly all liberal. Republicans increasingly all conservative. And meantime, the Democrats have lost a lot of their adherence that they had during the mid-to-late 20th century. And so we were basically on a one-third, one-third, one-third electorate, Republicans, Democrats, Independents, with the Republicans and Democrats at each other's throats. Every election controlled, all the institutions up for grabs. And this had led to a much more fractious politics even though the underlying opinion distributions hadn't changed very much in the population. Meanwhile, issues don't get resolved, problems don't get met. And so all around the world, it's not left/right, it's simply the fact that governments are failing to meet ordinary citizens' expectations.
>> At the top of the list of voter expectations is the economy and how financially secure they feel.
>> When it comes to economics in elections, it's really simple. It's just how are ordinary people seeing it affect their daily lives and the lives of their communities? That economic question dominates all other economic questions. It dominates taxes. It dominates the budget deficit, which only wonks care about the budget deficit, although it's obviously really important. But the average voter simply doesn't vote on something like that.
>> There are a multitude of important economic and financial issues in this year's election cycle.
>> One, of course, has to do with the fate of taxes -- what is going to happen? We are entering a election cycle right now which not only focuses on the top of the ticket, of course, but in the all-important Senate and the House of Representatives. And any changes there could be monumental as we think about the issue of taxes. And regardless of who wins at the top, and quite frankly who takes the House and the Senate. We have Trump tax cuts that are expiring at the end of 2025. We also have the all-important issue of energy. So questions about fracking, questions about drilling, issues involving Medicare. We have an issue that we may not define in American politics directly as an issue of the economy, but it certainly has its impact, and that's the border and immigration. Which is one of the key issues on people's minds. We have, of course, interest rates and the cost of living, and in particular, housing. And then, of course, as we look overseas, we have issues of how we will as a nation continue to confront China. We also have the issue more broadly of trade. And so those are just some of the litany of issues as we think about this broad bucket of the economy. But certainly as we look at the polls, whether going back two/three years, or just this week, or three hours, quite frankly, it is the economy that's on the minds of most people when they vote. In addition to the economy, immigration, border security are really weighing on people's minds. And interestingly, that's not just people in the border states anymore like it used to be. That is now people in states you wouldn't expect to be thinking about this as much, like a state like New York, a state like Michigan, Illinois. It's hard to find a place in the United States where people don't think that this is a critical challenge for us.
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>> The US isn't the only country facing a major election this year. Nearly half of the world's population goes to the polls in 2024 to choose their government leaders. In Europe alone, significant elections have taken place for the European Parliament, the United Kingdom, and France. Taggard Davis highlights key takeaways.
>> If we look at the outcome of these elections and the new political landscape that is emerging in Europe, if you look at national governments, you can see more antiestablishment forces in power in some jurisdictions, populism on the rise. If you look at the European Parliament, the democratically elected institution of the EU, central powers have held the line. A coalition of center-right center-left center and green parties will continue to hold power in that institution. But antiestablishment powers on both the right and the left and more so on the right are certainly much larger, stronger forces in European decision-making. So what does this mean? It means that decision-making, both at national level and supranational level, internationally in the European Union, is going to be much more difficult, much more fragmented, at a time when Europe is facing some really prodigious challenges, especially economic challenges. When you look at Europe's growth and productivity, there are some numbers that are really worrying a lot of EU policymakers currently. So if you look at the European Commission's own forecast, the economy of the euro area is set to grow by about 0.8% this year. That's a third of the growth rate predicted for the US economy. If you look at the European Central Bank's data, productivity in the euro area last year fell by 1%. That contrasts with half a percentage point of growth in the US economy. There is a real anxiety in Europe that, while the US economy is getting larger, the European economy is getting smaller. So looking at the political constellation that we have in place now with more fragmented governments, more antiestablishment powers in place, can Europe really rise to these challenges, both domestically and the EU as an institution? Can they get the right policy mix in place to find economic growth? If you look at some of the recent governments that have been cobbled together in some jurisdictions, last year, we saw the Dutch government coming into force that is more or less a technocratic government but with nationalist parties. In France, Macron will remain the president for another year or so, but he's going to have to govern with a left-wing national assembly. In Germany, we have a very weak coalition government in place, and we expect Germany to lurch further to the right next year when they have a national election. We have nationalist parties in power in Finland and in Italy. All of these governments are going to have to come together and agree a coherent policy agenda. So if you put this in US terms, imagine JD Vance, Alexandria Ocasio-Cortez, and Joe Manchin all coming together consistently to agree a coherent policy agenda throughout the year. It's not an easy task for EU policymakers right now. And the elephant in the room, of course, is the US election.
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>> With such strategically important and complex issues, we need leaders who are able to carve a diplomatic path forward now more than ever.
>> It has been a perennially tough year to be a leader not just in the United States but around the world. We have seen incumbents in many of those cases so far either lose or not do as well as polls suggested they might. And one of the things that makes it so difficult, if you look just at the case of the US election, is the amount of gridlock there is in our system. Which makes it difficult for leaders to fulfill their promises made on the campaign trail when they get into office. In the US, going back several decades -- we've had in the last just four years, a Congress that has been split almost evenly. The House obviously now controlled by the Republicans very narrowly, and the Senate controlled by the Democrats, very narrowly. That may change in this election cycle. But by all indications, whoever takes the House and the Senate is going to control it again very narrowly. Which makes the prospect of policy change incredibly difficult regardless of who is elected and who is in office. On the plus side, for people who don't want to see a lot of change -- they don't trust, for instance, either party to get control of the government and move it in one direction or the other -- that is not the worst-case scenario. But for people who do want change in one or more areas, it's going to be difficult to achieve.
>> One obvious hurdle in the US is the process for federal budget negotiations and the debt ceiling limit.
>> The deadline is going to come very soon in the fall. And more likely than not, it will be put off and put off until they are forced to get it done. It's not really any way to run a budget, but that's how we've been making policy in our system for a long time. So I don't suspect that'll change much regardless of what happens at the polls this year. Because as we forecast out the House and the Senate races, for instance, there is very few House seats up for grab in our system that's so gerrymandered. And in the Senate, it's a more difficult map for the Democrats, easier map for the Republicans. But in this election cycle, you may see some voters split their ticket, which may change a little bit of that. But what it looks like, it's going to be close either way in both the Senate and the House, making policy changes difficult. And what that means for whoever ends up winning the presidency is they're going to have to try to fulfill the promises they're making right now on the campaign trail via an executive order. And those of course can be overturned by the court, as we've seen repeatedly. They can also be overturned by the next person who comes in for the presidency. And I would just mention on this policy issue that we shouldn't forget the states. The states have had a lot more room to maneuver, a lot better ability to install policies at the state and local level. I tell people they should watch their own state capital and those that impact them particularly from business perspective, because you may see more policymaking in that end than you will at the federal level.
>> European countries and the European Union also face challenges that are impacted by this year's elections and will continue to be impacted by election outcomes.
>> Looking at economic policy in Europe, one thing to mention is that fiscal space is enormously tight. Governments just don't have a lot of firepower in Europe. Growth is sluggish. Productivity is down. And this is really fueling a lot of anxiety across many European countries and certainly in Brussels at EU level. To take an example, if you look at the size of the European Union's economy 10 years ago, it was 90% the size of the US economy. Today the EU's economy is roughly 65% of the size of the US economy. As one senior EU policymaker said to me recently, America and China are getting bigger and Europe is getting smaller. And so this has had EU policymakers taking a careful look at Europe's relative competitiveness versus other geopolitical superpowers. And there is a real desire both in the run up to these elections and now delivering on election manifestoes to really inject and reinvigorate competitiveness into the European economy. And so that means looking at regulatory burdens and trying to reduce those regulatory burdens. It also means trying to leverage productive finance from the private sector as well. Europe trying to leverage its assets much better in these choppier waters. EU policymakers are really concerned about Europe becoming the world's museum. It's a nice place to come and visit. It's got beautiful old cities. It's got a lot of history and great food and drink and entertainment. But it's not really the engine of growth that it once was.
>> Growth and competitiveness are key tenets of a report being produced by Mario Draghi, the former Italian prime minister and head of the European Central Bank. This report is expected to shape EU policy for the next five years.
>> Competitiveness is one of the few things that a broad coalition, with the exception of the ultranationalists and populace, but what a broad coalition of these different groups can agree on. They all agree on the need to reduce pressure on the public purse and galvanize private sector financing for the economy. They may not agree on exactly how to do that, but they recognize that, as some EU policymakers put it, it's a now or never moment for Europe, for Europe's competitiveness. That may mean that notably the EU Green Deal, while not going away entirely, will sort of slide into the slipstream of the broader competitiveness agenda. So where the Green agenda doesn't deliver growth and jobs in Europe, it will become less of a priority over the next five years. There is even a commitment to potentially grant planning and development permissions on greenbelt land that has remained untouched over past decades. Labor recognizes there is a need to address a housing crisis, and they need to bring jobs to every part of Britain, especially to the north of Britain.
>> Many economists and investors are also watching the US election with an eye on geopolitics and the role the US will play in global diplomacy.
>> I've always described America as reluctant internationalists. They understand the United States can't sit back, the United States has to take a leadership role, but they don't like it. That part of Trump, getting NATO to pay up, I think was a really popular view out there in the country. I think basically some skepticism about American involvement is a more electorally viable position than we're going to get involved everywhere around the world. The neocons, I think they're barking up the wrong tree when it comes to sort of trying to achieve any kind of popular support.
>> Taggart also sees challenges to global trade and how that impacts the European economy and financial markets.
>> In recent years, it's fair to say that probably coordination at G20 level has struggled, really owing to the major geopolitical divisions that we've seen. The G7 has probably played a more important role. It's a smaller club. It's a little bit more wieldy than the G20. If you look at the World Trade Organization, WTO reform has really lost momentum. Even strong proponents like the European Union have, I think, gotten a bit fatigued with trying to reform WTO. And even IMF and World Bank have seen some strains in recent years. And all of this matters. The European Union always likes to describe itself as really unabashedly in favor of multilateralism and global trade and open economies. And the EU really remains signed up to multilateralism, but maybe not as naïvely as they were in the past. When looking at financial markets and financial market policy, sometimes policymakers talk about capital leaking out of Europe to fund US companies and being used to buy out European companies. There's less discussion on all the capital that is flowing into Europe from other jurisdictions. But capital is sometimes described as a sort of European good that is leaking out of the region. So what does all this mean? Well, there will be more of an emphasis on industrial policy on Europe. When we look at the technology industry, we'll continue to see more focus on strategic autonomy when it comes to US technology, when it comes to cloud service providers, when it comes to artificial intelligence. There will be a greater emphasis on European strategic autonomy. And we may see Europe adopting trade defense instruments in a greater way, like restrictions on outbound investment for European companies. Which is something that we've already seen under the Biden administration. So in some ways we might see Europe starting to ape US policy more when it comes to trade defense instruments and investment restrictions.
>> Time will tell whether US policy continues in the same direction or pivots after US voters have cast their ballots in this year's general election.
>> People are hungry for something new. It's just there is this hardy oligopoly that makes it very difficult for anything new to surface. And it's clear that a lot of what the party leaders do in Congress is based on maximizing donations, not on solving the problems, not on meeting the challenges we're facing.
>> There's a basic human tendency to blame the people at the top when organizations aren't meeting their goals, whether that's in business or in government. Instead of cycling back and forth between parties, the answer may be in changing how government functions.
>> The reality is it's often the fact that the organization itself is structurally not working in the way it should. And so it needs to be reconsidered. That's something that we do in business all the time, and it's something that we should do in government. In our system, it's very difficult to do because the Framers made it difficult to rethink the system and amend it. And so there is that aspect. Then there is also the aspect of people as Americans and people who love democracy, they hold what happened at the Founding very dear, right, they should, and they are loath to make any changes to what the Framers did.
>> It's rare in business for a true visionary to come along and disrupt the status quo. That's even more rare and much harder to do in government. For investors, the key to enduring this year's election cycle may be to stay focused on long-run goals, avoiding the noise, and remaining objective in the face of volatility. Thanks to our experts, Jeanne Zaino, Morris Fiorina, and Taggard Davis for their observations and insights into this year's elections landscape. The OUTThinking Investor is a podcast from PGIM. Follow, subscribe, and if you like what you hear, go ahead and give us a review. If you enjoyed this episode and want to hear more from PGIM, tune into our new podcast, Speaking of Alternatives. See the link in the show notes for more information.