After Labor Day, the race for the White House will shift into high gear. Aside from the brief bump post-GOP convention, Trump has consistently lagged Clinton in the polls. However, it’s still too early for Hillary to begin picking out her drapes for the White House. According to a recent CNN Poll of Polls, the race is back to its pre-convention levels. Clinton holds an average of 42% support to Trump's 37% across five nationwide polls.
No matter who wins in November, one thing is sure — the next two months promises to be filled with unprecedented drama – like no other presidential election.
It’s all about the economy
In the end, elections come down to the economy — jobs, wages, and trade. In this respect, the differences between the two presidential candidates are significant. With that stated, it’s important for investors to understand global economic and market implications under two very different presidencies.
On Global Trade
Markets prefer certainty over uncertainty — who doesn’t. For the most part, the markets suspect they know what they are getting with a Clinton presidency and should react less negatively to a Clinton victory.
About 40 percent of the S & P 500 companies generate about 40 percent of their revenues from global trade, and it should be business as usual under a Clinton presidency.
Unlike Clinton, Trump promises to renegotiate our trade agreements because he believes they are simply “terrible.” The author of the “Art of the Deal” will use his deal making skills to renegotiate trade deals that are "fair." His protectionist rhetoric could make for profound instability in global markets. In fact, markets are scared to death of Trump’s unpredictable patterns of behavior.
The financial sector
Under a Clinton administration, financial service companies will be hit with even more regulation. Hillary is also a big supporter of the Consumer Financial Protection Bureau promulgated by her close ally, Elizabeth Warren. New rules will increase costs for the financial companies, yet paradoxically, the financial sector is rising in the belief that a Clinton presidency will be better for the economy. Again, markets prefer certainty.
On the other hand, Trump plans to roll back Dodd-Frank and eliminate the Consumer Financial Protection Bureau. Similar to Bernie Sanders, he promises to bring back an updated version of the Glass-Steagall Act (which should never have been repealed in 1999). The Glass–Steagall Act describes four provisions of the U.S. Banking Act of 1933 that limited securities, activities, and affiliations within commercial banks and securities firms.[1] In theory, this should be better for the economy as it unleashes growth and profits for the smaller regional/community banks and reigns in Wall Street and big government spending.
The healthcare sector
The healthcare sector will be facing a very different set of pressures from the two administrations.
Clinton will be tough on the pharmaceutical and biotech sector. However, she will be positive for managed care stocks.
Trump promises to repeal the Affordable Care Act known as Obamacare, a negative for managed care names. He is a positive for big pharma/biotech by his promise of less regulation. He also vows to open state health insurance markets to more competition by eliminating "the lines around states."
The Energy Sector
No matter who wins the presidential race, the energy industry is plagued with an oversupply of both oil and natural gas. Countries are producing more oil than current demand, thanks to technology, putting downward pressure on prices. When it comes to this sector of the market, government policy is very different for the two nominees.
Clinton will continue to promote alternative, “green energy” and discourage fossil fuels, particularly coal.
Trump, however, will promote the XL pipeline, and support fossil fuels, such as coal. His populist rhetoric could strengthen the dollar, leading to lower energy and commodity prices.
The Industrial Sector
Industrial stocks levered to infrastructure projects should fare well under both Clinton and Trump. Interestingly, industrial stocks rallied earlier this year due to Clinton's aggressive infrastructure spending plan.
Hillary Clinton has proposed $275 billion in direct spending on infrastructure over five years. (click here). That’s not nearly enough, according to Trump, but at least she has a plan.
Trump is crafty and has yet to lay out a clear plan for his ambitious infrastructure agenda, a hallmark theme of his campaign. If Trump wins, congressional Republicans will most likely still control the House and can try to rein in his spending plans.
On corporate Taxes
As we have stated in past posts, business spending is lackluster. In fact, if you delve deeper into the numbers, you’ll discover a business recession. And the Fed can’t fix it. Profits, business investment, and ISM manufacturing are all down.
According to Fact Set’s 8.29.16 report on earnings growth: “For Q2 2016, the blended earnings decline for the S&P 500 is -3.2 percent. [2] The second quarter marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.”
So what’s the solution?
Help businesses get out of a recession with tax reform is one possible answer.
Secretary Clinton has yet to announce a corporate tax plan. However, she has stated that she wants to raise taxes across-the-board on individuals, businesses, and investors. At the risk of sounding partisan, raising taxes and regulations on businesses is not a formula for getting out of a business recession. She has proposed a “fair share surcharge” on the rich to ensure the wealthiest are not able to pay lower tax rates. Click here for Hillary Clinton's tax reform plan.
Trump, on the other hand, wants to cut the corporate tax rate from 35 to15 percent, reduce regulatory burdens, and enact a smart repatriation plan to bring a few trillion dollars in corporate cash back to America. He also wants to eliminate the corporate alternative minimum tax. Click here for Trump’s tax reform plan.
Our bottom line
With all this information, the most important questions are:
- How will your investment portfolio perform under new American leadership?
- What changes in strategy are prudent?
Besides election uncertainty, high market valuations and punk earnings growth make us cautious.
The market is anticipating a Clinton win. A Trump victory would surprise markets, particularly as risk-parity trading algorithms used by the largest hedge funds and many money managers, are caught wrong-footed. Subsequently, volatility would pick up and we could experience a market correction of 5 -10 percent as risk markets adjust. Remember how markets reacted after Brexit? However, markets could get an eventual lift from a Trump victory as animal spirits get aroused because of his proposed tax and regulatory reforms.
This October could prove to be a particularly volatile month with game-changing global events converging — Brexit negotiations and the widely anticipated WikiLeaks Clinton email dump, just to name a few.
At this juncture, given our cautious position towards risk assets, we are holding higher levels of cash relative to our benchmark model allocations. A well-balanced portfolio should perform well under either candidate and weather volatile markets. And in a growth-starved world, a disciplined asset allocation strategy will be a key determinant of your portfolio returns.
Sources: The Wall Street Journal Online; Bloomberg News; Forbes.com; The Economist.com; CNBC News; CNN.com; Reuters News.
Footnotes:
1. Glass-Steagall Legislation from Wikipedia, the free encyclopedia.
2. Fact Set Earnings Insight, August 29, 2016.