From TACO to Big MAC

The accompanying chart shows the status of the Big MAC growth factors. By convention, the factors are design so that a rising line is favourable for Republicans, and any indicators of equity relative performance is measured against the equal-weighted S&P 500 in order to minimize the outsized weights of megacap growth stocks.

The growth factors have been good news for Republicans. The top panel depicts equity market growth expectations, which are all rising as cyclical market leadership is becoming more dominant. The middle panel also tells a similar story of improving market breadth, indicating more and more companies in the stock market are exhibiting greater price strength. The bottom panel shows the trade-offs of growth between the stock and bond markets. Higher growth expectations are boosting inflation expectations, as shown by the positive relative performance TIPs against long Treasuries, and a steepening yield curve.
 

 

Indeed, there has been a loose correlation between growth expectations and treasury yields. Changes in the U.S. Economic Surprise Index (ESI), which measures whether economic indicators are beating or missing consensus expectations, have roughly tracked changes in the 10-yearTreasury yield. The recent surge in ESI could put further upward pressure on yields, which would be an unwelcome development for the Trump Administration.
 

 

The growth factors I just reviewed represent the top part of the K-shaped recovery, which is a focus of Wall Street, the providers of capital. The bottom part of the K. or Main Street, is more focused on affordability. While Wall Street drive asset returns, the middle and bottom Main Street has the voting power.

One major factor that won Trump the presidency against Biden was the issue of affordability, but the problem hasn’t gone away. Affordability isn’t just about rising prices, though that is a big concern for much of the electorate. Political analyst Nate Cohn argues in a column that the affordability problem among young adults is “trying to buy a ticket to the middle-class life”. Cohn observed that a generational divide in dissatisfaction is appearing and it’s not being fully captured by conventional economic statistics: “These costs are borne disproportionately by young families, but the Consumer Price Index represents the average consumption patterns for the entire adult population”.The accompanying chart shows the progress of the Big MAC affordability factors, and it’s not good news for the Republicans. Oil prices are rising more than other commodities (top panel); market inflation expectations are rising (second panel); agricultural industries are beating the market, indicating upward pressure on food prices (third panel). Housing is roughly flat against the market (fourth panel), but credit card companies are being squeezed and underperforming the market (bottom panel).
 

 

The affordability issue is becoming a growing problem for the Republicans in 2026. The latest BoA survey shows that annual food inflation rose to 3.9% in January, which is a rate well above the Fed’s 2% inflation target. The problem has become so prominent that Pepsico reduced the pricing by up to 15% on Doritos, Cheetos and other snacks (see WSJ report).
 

 

While the Big MAC growth factors are a tailwind for the Republicans in this election cycle, the affordability factors are showing up as a negative. As midterm elections tend to be a referendum on the Republicans, a ruling party that has control of the White House, the Senate and the House, these conditions are bad news for the GOP. Trump’s approval ratings are deeply underwater with independents this election cycle.
 

Even worse, his approval ratings are sliding among Republicans.

 

A recent Harvard Cap/Harris poll found that the Democrats have an 8% lead among registered voters and a 4% lead among likely voters in the midterm generic ballot.