Viewing Election Day Through an Investment Lens

Tab 1

October 21, 2016


As the 2016 political campaign marathon nears Election Day on Nov. 8, investors have started to assess the implications beyond the vote. Naturally, the bulk of the nation’s attention is focused on the presidential race, where Republican Donald Trump and Democrat Hillary Clinton are vying to become the country’s leader.  

 

Yet the ultimate effectiveness of any president stems in part from his or her relationship with the senators and representatives who comprise the legislative arm of Washington’s power structure.

 

Effects of a Sweep by Either Party

 

While the prospects of four more years of a divided government are unappealing for many, the alternative might strain your portfolio.

 

Andy Laperriere, head of U.S. policy research for Cornerstone Macro, suggests that a Trump win would likely mean Republican leadership across the board because Congress is expected to remain in the party’s hands.

 

This domination could result in the implementation of at least part of the economic agenda proposed by Republican Speaker of the House Paul Ryan, as well as the adoption of more traditional Republican initiatives around energy and defense.

Still, Laperriere says, a Trump presidency may be unsettling for the markets, which don’t respond well to uncertainty.

 

“I think the one area where Trump has real conviction is trade, and investors ought to take him seriously on that,” he says. “Beyond that, he’s unpredictable.”

 

On the other side of the aisle, in the unlikely event of a Democrat sweep, concerns would arise immediately in the financial, healthcare and energy sectors, Laperriere says. Furthermore, growth outlooks would fade beneath the overlay of likely higher taxes — particularly on corporations, investment income and individuals — and expectations of a higher minimum wage and more regulations.

Tab 2

October 21, 2016


Fiscal Policy Figures to be an Early Flashpoint

 

Regardless of which party captures the White House, Laperriere believes there will be a push to stimulate the economy through fiscal measures.

 

An Election Day sweep by the Republicans could lead to the adoption of the sizable tax cuts proposed by Trump. Yet, Laperriere questions to what extent congressional leaders also would push for reforms of the tax system and entitlement programs such as Medicare and Social Security.

 

In a Democrat-dominated Washington, the execution of Clinton’s proposal to raise taxes dollar for dollar with spending increases would “probably be a negative,” Laperriere says.

 

A Clinton win may not lead to any material change in the current outlook for volatility, rates, credit or the composition of the Federal Open Market Committee (FOMC).

 

A Trump win could lead to increased volatility and a flight to safe-haven assets, which could lead to a decline in rates and underperformance of credit.

Potential Election Beneficiaries

 

Both 2016 presidential candidates have stated platforms that are less favorable toward global trade (which, on balance, has been a major deflationary force for several years, thus bolstering both valuations and stock prices) while maintaining opposing views on energy policy, financial regulatory reform and changes to the Affordable Care Act. Additionally, both platforms seem to advocate for increased infrastructure and strong military.

Tab 3

October 21, 2016


Regardless of who wins the presidential election, companies in industrial and materials businesses that cater to the construction of roads and bridges may be positioned to be potential beneficiaries of higher infrastructure spending.

 

Military equipment, armament and surveillance are areas that could benefit from higher spending on defense.

 

Companies with large offshore cash balances may also benefit from any repatriation tax relief.

 

Potential beneficiaries of Clinton’s platform: Clinton’s platform favors extending the Obama administration’s policies as well as additional socioeconomic policies. Areas that could potentially benefit include:

  • Alternative energy (less fossil fuels in favor of alternative energy, including renewable subsidies, carbon tax, drilling restrictions and efficiency standards)
  • Hospitals, pharmacy benefit managers, drug distributors, HMOs and healthcare IT (healthcare services and companies designed to keep costs down)
  • Real Estate Investment Trusts (REITs) and insurance companies (beneficiaries of financial regulation)

Conversely, Clinton’s proposed minimum wage legislation is apt to weigh on service firms where lower skill labor is a large part of the cost structure (restaurants and hospitality).

 

Potential beneficiaries of Trump’s platform: Trump’s platform appears more focused on policies and desired results, thus making it difficult to assess areas that may benefit or be at risk.

 

On balance, favorable market reaction to Trump’s pro-business economic and tax plans may be offset by fears of protectionism and a general sense of uncertainty.

 

Areas that could potentially benefit include:

 

  • Oil and gas exploration and production (lower regulatory hurdles)
  • Railroads, mining and metal companies (focus on infrastructure)
  • Biotechnology, specialty pharmaceuticals and medical device companies (focused on providing cures and extending life expectancies, as well as on cost controls)
  • Financial institutions (beneficiaries of less regulation and a steepening yield curve)
  • Technology (lower taxes and repatriation)
Tab 4

October 21, 2016


Conversely, Trump’s focus on illegal immigration could be a headwind for the agriculture, construction, restaurant and retail industries.

 

Laperriere projects dim prospects for passage of the Trans-Pacific Partnership, a 12-nation trade deal that has been a hot-button issue during the campaign. In addition to Trump’s opposition to the measure, Laperriere expects that Clinton probably would stick to her campaign pledge against it.

 

Whatever happens Nov. 8, if you have questions or concerns about how the results might potentially impact your investment portfolio, contact your Wealth Management Advisor at The Private Client Reserve of U.S. Bank.

 

Read more in the situation analysis “2016 Election Year Dynamics” published by The Private Client Reserve.

The information presented by Andy Laperriere reflects his views and opinions and those of Cornerstone Macro. Other commentary reflects the opinion of U.S. Bank Wealth Management and does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any particular individual. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Cornerstone Macro and any other organizations mentioned are not affiliated or associated with U.S. Bank in any way.

 

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