Financial Insights

Leadership Change

Tick tock, tick tock, tick tock. No, not the Chinese-owned social media/video platform, TikTok, with over 100 million US users and currently in the crosshairs of an angry Congress, but tick tock, tick tock, the clock. The clock is running to November 5. Election day is inescapable.

Leadership change is a possible outcome of the presidential election. It is also possible that current leadership maintains its office. A third possibility is that either one or both of the main contenders today does not participate in the final ballot in November. Ultimately, either the US maintains current leadership, or it doesn’t. A binary outcome.

Leadership in financial markets is much trickier than a yes/no, on/off outcome. Here, leadership is decided by millions upon millions of monthly, weekly, daily, hourly, by-the-minute decisions. In elections, voters get one vote each go round, making for lumpy yet long-lasting turns at the helm. Market participants (investors), in contrast, vote with their dollars continuously. Market leadership can persist for long periods, but can change in a heartbeat. Political leadership changes are (theoretically!) known once ballots are counted. Market leadership can be identified with certainty only in hindsight.

Longevity of leadership in politics is a known quantity: four years minimum for a president. Market leadership is less stable and is less predictable. As we can see in the matrix below (showing various global asset class performance by year and year-to-date February 2024), we can see that market leadership rarely lasts consecutive years. Commodities led returns in both 2021 and 2022. No other asset class topped the list consecutively.

Image Source: https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/return-map

A similar matrix can be constructed for US markets: large to small, growth to value. And the lesson is the same. Market leadership does not last long. Certainly not as long as a single presidential term. Further, market leadership does not wait for convenient times, like “election day” to change course.

When does market leadership change? The Nifty Fifty growth stocks captivated market attention and investor purchasing flows from the 1960s until they crumbled in 1973. The Dot-com bubble took years to inflate before beginning its collapse in 2000. US large cap growth stocks, largely driven by the “Magnificent Seven,” propelled that style to a better than 40% gain in 2023. Will that leadership continue? Two major components of the Mag-7 appear to be stumbling. As Herbert Stein wrote in What I Think: Essays on Economics, Politics and Life, “If something cannot go on forever, it will stop.” Does your crystal ball tell you leadership is changing?

Lesson to investors

Certain trends we see will take years to play out. Artificial Intelligence and the voracious demand for semiconductor chips, data centers and the multitude of supporting industries plays a feature roll in ACM portfolio construction. Drug development, health care advances, population longevity: these are also key components of trends that will continue for years and will have representation in our holdings. But trends and market leadership don’t go hand-in-hand. Emotion, hype, FOMO (fear of missing out) all have a great deal to do with market leadership and its fleeting nature.

Market leadership is great for telling what happened. Political leadership is much more likely to point us to what is going to happen. Politicians are judged on fulfilling campaign promises, after all.  ACM’s portfolios are constructed to participate in trends with long futures as well as provide risk management for contingent outcomes.

 

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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