Optimistic market forecasts at risk thanks to shifting global politics and ‘mother of all election years’

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Investors may want to ponder how the “mother of all election years” could ripple through financial markets over the year ahead.

Half the world’s population will be going to the polls in 2024, according to the Council on Foreign Relations (CFR), a U.S. think tank. About 4 billion people in more than three dozen countries will be choosing leaders.

For now, investors are shrugging off any potential risk from this electoral buzz. Markets are buoyant. Forecasts are optimistic. The conventional wisdom says inflation and interest rates will continue to trek lower in 2024, leading to decent returns on stocks and bonds, even if a mild downturn occurs at some point during the year.

So long as you look only at the economic side of things, this seems a reasonable enough forecast. However, the prevailing mood ignores the substantial risk that politics poses in 2024.

At least 10 elections hold the potential “to be consequential not just for the country in question but for its neighbors as well,” writes James Lindsay, senior vice-president of the CFR. His list of important ballots in what he calls the mother of all election years includes the races in India, Mexico, the European Union and – most important of all – the United States.

A win by Donald Trump in the November presidential race “could lead to the demise of American democracy and upend the global order,” Mr. Lindsay warns.

Sadly, this is no exaggeration. Mr. Trump insists, against all evidence, that the 2020 election was swiped from him. He has vowed to get even with his domestic opponents. If he is re-elected and follows through his promises of revenge, expect mayhem.

The international repercussions of a Trump victory could be just as severe. Mr. Trump detests NATO, shrugs off climate change and promises to use tariffs to place a “ring around” the U.S. economy. A second Trump term could deliver a shattering blow to global institutions, Mr. Lindsay argues.

Investors who are tempted to brush off this danger should think again. Yes, the stock market performed well for much of Mr. Trump’s first term from 2017 to 2021. But a lot has changed since then.

For one thing, the world has become a more dangerous place. The Ukraine-Russia war and the Israeli-Palestinian conflict are killing massive numbers of people. Both have the potential to spiral into bigger, more complicated crises.

The military challenges become even more intimidating when money is factored in. Thanks to the costs of fighting COVID-19 and supporting households during pandemic lockdowns, many countries – including the U.S. – are now much deeper in debt than they were four years ago.

One way to view the problem in a U.S. context is to look at how much Washington owes in comparison to the size of its economy, or gross domestic product (GDP).

Since the start of the pandemic in 2020, U.S. federal debt has surged from an already hefty 80 per cent of GDP to nearly 100 per cent, according to Nathan Sheets, global chief economist at Citigroup. It is poised to rise even further, to 115 per cent of GDP, over the next decade, he says. If so, the U.S. debt load will reach its highest levels since the end of the Second World War.

The solution to these budget woes is simple enough: raise taxes or cut spending. The problem is that Mr. Trump has never been inclined to cut spending and prides himself on being a tax slasher. He swelled the U.S. deficit during his first term, even before the pandemic struck, thanks largely to a massive tax-cutting binge.

He is rumored to be planning more tax cuts if elected in 2024. That sets up a potentially ugly scenario if Mr. Trump continues to lead in the polls heading into the fall.

Investors may decide that U.S. Treasury bonds – the world’s most secure security – aren’t quite the safe bet they used to be. They may ask for higher interest rates to compensate for the risk that would be posed by growing deficits. Higher rates would upend the happy scenario that forecasters have painted for 2024.

That is just one scenario, of course. The torrent of elections in 2024 could shake things up in other ways as well.

For instance, the outcome of the Taiwanese presidential election on Jan. 13 could lead to a new confrontation between the U.S. and China on the island’s future. The Indian national elections in April and May could underline concerns about the country’s growing authoritarian tilt. And the European Parliament elections on June 6 to 9 could see anti-immigrant, populist politicians become the dominant force on the continent.

How might these changes affect markets? Incumbent politicians are unlikely to rein in government spending if they’re in a tight race for re-election. They are more likely to embark on military adventures as a way of galvanizing popular support. They are also more likely to announce sweeping changes in tariffs, taxes and other regulations.

Investors may want to keep these risks in mind. An unusually high level of political uncertainty means that 2024 is likely to be more complicated than current forecasts envisage. Sticking to safer investments – bonds, dividend paying stocks and the like – seems like a fine resolution for what could be a surprisingly chaotic year.