2024 U.S. Equity Outlook
Fourth Quarter
Key Takeaways
Presidential candidates Kamala Harris and Donald Trump will likely take strikingly different approaches to mergers and acquisitions (M&A).
Productivity growth is critical to corporate profits and could help solve some seemingly intractable social and political challenges.
Growth Stocks
Owning Good Businesses Is a Better Investment Strategy Than Trading on Electoral Headlines
As we near the end of the electoral season, clients ask what we’re doing about the elections and how we’re positioning for this or that political outcome. But that’s not how we manage money, and we don’t believe you should either.
Consider these significant political events of the last several months as one example of why we don’t think this sort of approach makes sense. In May, former President Donald Trump was found guilty in a hush-money trial. In June, Trump effectively knocked President Joe Biden out of the race at the first presidential debate. In July, Trump survived an assassination attempt, and the sitting president dropped out of the contest in favor of a new candidate, Vice President Kamala Harris. Each party named its vice presidential candidate by August and held a nominating convention.
After each event, we could have cited headlines arguing for the ascendancy of one candidate or the other. The Harris-Trump debate in September is no exception. Which of these headlines should we have taken a position on? We hope it’s evident that the answer is none of them.
Rather than focus on political headlines, we put our energy into identifying good businesses. We believe companies with solid long-term growth prospects are more likely to generate wealth for our shareholders over time. These firms are also better situated to ride out electoral or economic uncertainty.
Identifying Some of Our Country's Key Long-Term Challenges
To refocus the conversation on long-term trends, we’d like to discuss demography and the national debt — enduring challenges that we don’t think get the consideration they deserve. There’s one solution to both problems: Productivity growth provides a route to a larger economy per worker.
In America and all over the developed world, populations are graying as people live longer and have fewer children, on average, than prior generations. These demographic changes have very real consequences for economic growth. One Stanford study estimated that “a 10% increase in the fraction of the population ages 60+ decreases gross domestic product (GDP) per capita by 5.7%.” That’s a shocking statistic.
Our aging population also changes the retirement calculus. Today, the Social Security Administration posits that there are 2.7 workers per retiree . Unfortunately, that’s already below the estimated minimum number of workers — between 2.8 and 3.3 — needed to sustain Social Security at current levels . These demographic realities will necessitate politically unpopular changes to Social Security benefits, funding or both.
This brings us to another seemingly intractable problem — the size of the national debt. According to the Federal Reserve (Fed), total public debt is above 120% of GDP as of the second quarter of 2024. Unfortunately, the larger the debt, the higher interest rates must be to entice additional Treasury bond buyers, all else equal. Simply paying interest on the debt takes up an ever larger portion of government spending over time, crowding out things we actively want the government to do.
Productivity’s Benefits Depend on Our Policy Choices
Productivity is a way to measure the output of each worker in the economy. It’s important from the worker’s point of view because the more productive workers are, the higher their wages can be.
Productivity is essential from the business point of view because the more productive a firm is, the more it can produce from the same inputs. As a result, productivity is critical to corporate profit growth. As investors, we’re working to identify companies actively generating and benefiting from productivity gains through enterprise digital transformation, artificial intelligence (AI), factory automation or other trends.
Helpfully, rising productivity is also beneficial to the broader economy — it offers a way to increase economic output without causing inflation. More efficient workers and a healthier economy will be key to easing society's demographic and debt burdens.
Now, let’s turn the conversation back to politicians. Policymakers have a role in how the costs and benefits of productivity gains are distributed throughout the economy. For example, before the 1980s, productivity and wage gains went hand in hand. But policy changes since then have weakened the relationship . The point is that policy choices go a long way toward determining who benefits from rising productivity and to what extent.
Focusing on AI, there is already an academic and policy movement afoot to ensure that the technology actively enhances workers’ lives rather than disrupts them. Add this to the list of regulatory and economic concerns around AI we highlighted last quarter, and the next president should have no shortage of truly consequential work waiting for them, regardless of which candidate occupies the White House.
Value Stocks
How the Presidential Election Could Affect the M&A Landscape
In March 2023, a Fed supervisor emailed a Toronto-Dominion Bank attorney to tell the bank to expect longer delays in its planned acquisition of First Horizon Corp.1
It was another setback for a deal first announced in February 2022. By May 2023, the proposed tie-up collapsed.2
The episode exemplifies how the Biden administration's heightened regulatory and antitrust scrutiny has slowed M&A. On average, bank mergers have taken three months longer to close compared to those finalized under the Trump administration.3
Biden advocates limiting corporate consolidation to protect competition and consumer choice. In fiscal year 2022, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division took enforcement actions against 50 proposed mergers.4 That’s a record high since the U.S. first required pre-merger reviews in 1976.5
Would a Harris Administration Follow Biden’s Lead on M&A?
Few indications have surfaced about how Kamala Harris would approach mergers and acquisitions.
However, one clue emerged in mid-August when she announced a plan to combat high food prices. The proposal would impose a federal ban on price gouging and direct her administration to scrutinize proposed food and grocery industry mergers that could result in higher prices for consumers. The Harris-Walz campaign pointed to Kroger’s proposed acquisition of Albertsons as a deal that could increase food prices.6,7
This suggests that a Harris administration would continue to take a hard line on industry consolidation.
Would a Trump Administration Be More Amenable Toward M&A?
Donald Trump is broadly viewed as a pro-business candidate who might generally be more permissive toward corporate mergers. During his term as president, the FTC and the Justice Department were credited with streamlining inquiries and investigations of merger proposals and their resolutions.8
This doesn’t suggest that a second Trump administration would take an entirely hands-off approach to antitrust enforcement. His first term indicated a propensity to scrutinize large technology and social media companies. An antitrust case against Google launched during his presidency resulted in a federal court concluding this year that the company had monopolized online searches and advertisements. This ruling could lead to the search giant’s breakup.9
The outcome of the November election may affect the climate for corporate mergers in 2025 and beyond, although we don’t necessarily think investors should base their investment decisions solely on this issue.
Activists Bring Disruption, and Disruption Can Bring Change
In some ways, Southwest Airlines is a travel industry darling because it hasn’t charged passengers for checked bags, premium seating or the half-can of soda they get midflight.
For investors, however, Southwest is in the doghouse. Demand and traffic have remained strong, but profitability has eroded since the COVID-19 pandemic. The airline ramped up hiring in anticipation of growing its fleet of airplanes and, as a result, its capacity to fly to more destinations.
Then Boeing’s well-publicized manufacturing issues meant it could deliver far fewer planes to Southwest. Now, the airline’s cost structure isn’t sized correctly for the current environment.
Activist investor Elliott Investment Management took note of Southwest’s issues, built a stake in the airline and is now ready to wage a proxy fight to enact changes to the business.10 Elliott has criticized Southwest’s management for ruling out initiatives like premium products, basic economy seating and checked bag fees, suggesting the types of changes Elliott would seek to improve profitability.11
Elliott’s involvement is having an impact. Southwest has since announced plans for assigned seatings and opportunities for passengers to buy premium seats.12 The company’s chairman will step down next year as part of a board overhaul that Elliott wanted to see happen.13
Overcoming Temporary Headwinds
As value investors, we look for good companies with transitory issues that can be resolved. In that sense, we aren’t too different from activist investors. Ideally, we spot these companies and invest before an activist gets involved, given that share prices have often rallied after an activist investor makes its presence known.
Examples of activists pushing companies for changes include:
In 2024, Elliott Investment Management took a significant stake in Johnson Controls, an industrial company that has underperformed its competitors.14
Discount retailer Dollar Tree embarked on a turnaround effort after activist investor Mantle Ridge took a position in the company in 2021. Shortly after Mantle Ridge bought up Dollar Tree shares, the company agreed to add seven new members to its board of directors, including former Dollar General CEO Richard Dreiling as executive chairman.15
In 2017, Mantle Ridge bought up shares in railroad operator CSX Corp., which resulted in CSX hiring the activist’s preferred CEO. CSX increased its profits in the years that followed.16
Similarly, this year, Ancora Holdings has pressured railroad company Norfolk Southern to improve volumes and profitability.17
Investor activism has increased over the last two years. Last December, S&P Capital IQ said that activist campaigns in 2023 would likely match or exceed the activity in 2022, a record-setting year.18 The report attributed the rise in investor activism to increased market volatility and a challenging macroeconomic environment. These conditions have persisted in 2024, so it wouldn’t surprise us if the torrid pace of the last few years kept up.
Activist investors can cause headaches for management, but they can also bring about change for companies with solid fundamentals that have been saddled with problems that need to be — and can be — fixed.
¹Zoe Sagalow, “What Led to the TD-First Horizon Deal Termination,” S&P Global Market Intelligence, September 28, 2023.
²Zoe Sagalow, “What Led to the TD-First Horizon Deal Termination,” S&P Global Market Intelligence, September 28, 2023.
³The KBW Bank Brief – Deal Closings: Isolating the Political and Regulatory Angle | Keefe, Bruyette & Woods, August 18, 2024.
⁴Federal Trade Commission, “Hart-Scott-Rodino Annual Report Fiscal Year 2022.
⁵Leah Nylen, “Biden Antitrust Enforcers Set New Record for Mergers,” Bloomberg News, December 18, 2023.
⁶Joe Light, “Harris Wants to Stop Food “Price Gouging.’ What It Means for Grocery Stocks,” Barron’s, August 16, 2024.
⁷Ben Werschkul, “What Kamala Harris Will Say About Grocery Prices When She Rolls Out Her Economic Agenda,” Yahoo Finance, August 15, 2024.
⁸Andrea A. Murino, Peter M. McCormack, Katie Drummonds, and Emily Hsu, “Populist Instincts: A Trump Administration Antitrust Merger Perspective,” Antitrust 35, no. 3 (Summer 2021).
⁹Leah Nylen and Anna Edgerton, “U.S. Considers a Rare Antitrust Move: Breaking Up Google,” Bloomberg, August 13, 2024.
¹⁰Lauren Thomas, “Elliott to Launch Proxy Fight at Southwest Airlines,” Wall Street Journal, August 14, 2024.
¹¹Elliott Investment Management, “Stronger Southwest,” June 10, 2024.
¹²Southwest Airlines Investor Relations, “Southwest Airlines Launches Enhancements to Transform Customer Experience and Improve Financial Performance,” News Release, July 25, 2024.
¹³Alison Sider, “Southwest Airlines Overhauls Board Amid Activist Pressure,” Wall Street Journal, September 10, 2024.
¹⁴Crystal Tse, “Elliott Said to Build $1 Billion-Plus Johnson Controls Stake,” Bloomberg, May 20, 2024.
¹⁵Reuters, “Dollar Tree Settles with Activist Mantle Ridges, Adds Dreiling to Board,” March 8, 2022.
¹⁶Paul Ziobro and Corrie Driebusch, “Activist Investor Behind CSX Overhaul Sells Most of Its Stake,” Wall Street Journal, October 21, 2019.
¹⁷Josh Funk, “Activist Investor Wins 3 Norfolk Southern Board Seats but Won’t Have Control to Fire CEO,” Associated Press, May 9, 2024.
¹⁸Ken Shimokawa, “Evolution of Investor Activism: Breaking Down 2023 Campaign Activity and Assessing Future Trends,” S&P Global Market Intelligence, December 15, 2023.
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