Winner Take All: Post 2024 Election Playbook

• With former President Trump staging an unprecedented comeback, markets are responding quickly to price in a business and market friendly environment. While we see a strong case for steady spreads through year-end, we see reason for caution on credit spreads for the long-term (12+ months). With this, we are downgrading our recommendation on US IG and HY credit to Underweight from Market Weight and prefer selling into strength through year-end. We maintain our Underweight allocation to US Broadly Syndicated Loans.
• Through year-end, the outcome of the election is unlikely to change the Fed’s course and UST yield curve steepening is likely while technicals should support a continued rotation into credit. However, in the longer-term, the differences between campaign promises and reality are likely to prove challenging to markets as tariffs may overshadow incremental tax breaks and deregulation.
• Across sectors, the impact of a republican administration is generally mixed. The prospect of lower corporate taxes, continued personal tax breaks and deregulatory efforts is decidedly positive across the board; however, other policies, including tariffs and immigration, could outweigh some of these benefits.

With former President Trump staging an unprecedented comeback and strong showing from Republicans in Congressional races, markets are responding quickly to price in deregulation, tax cuts and, to a lesser extent, higher tariffs. We recommend investors take a more measured approach to policy change and subsequent impact on the economy and markets and see reason for caution on credit spreads for the long-term (12+ months). With this, we are downgrading our recommendation on US IG and HY credit to Underweight from Market Weight and prefer selling into strength through year-end. We maintain our Underweight allocation to leveraged loans. We recognize that technicals still firmly favor cash rotating into fixed income; however, we think the long-term path of spreads is likely wider rather than tighter, especially for multinational issuers.

In the near-term (through year-end):

Expect the Fed to cut rates by another 25 bp tomorrow and strike a balanced tone regarding the path of rate policy. While the outcome of the election certainly adds new considerations to the inflation dynamic over the next few years, the Fed is going to stay focused on the recent path of inflation and unemployment rather than trying to adjust policy to potential changes.