US election: Which stocks could rally after 3 November?
On a wider level, stock markets tend to underperform slightly during election years, though not to the point where portfolios need to be reallocated. Since 1928 in the year leading up to an election, stocks have gained less than six per cent. While the S&P 500 ended positive in 17 out of the last 23 elections with an average return of just over seven per cent. This is modestly lower than the average annual return. Interestingly, when an incumbent is re-elected or if a party retains control of the White House, equity returns are slightly higher than when a new party comes to power.
Different agendas, some things the same
The two candidate’s policy mix differs significantly and while a split Congress would limit either President’s ability to implement their agendas, a clean sweep will pave the way for more dramatic policy changes. This seems to be the case for infrastructure spending where there's an increased focus by both sides of the aisle, which could benefit a company like Caterpillar. One thing that will notably not change is the stance of the Fed, who will remain accommodative potentially for several years, regardless of the election outcome. This should be supportive for equities as the hunt for yield is unlikely to abate.
Fiscal policy will also remain expansionary under both candidates, although Biden’s policies argue for higher public investment, higher corporate taxes and increased regulation. Larger deficits would be in the pipeline if the Democrats win, estimated at close to 1% of GDP per year over the next term. This is higher than with a Trump presidency and would be front loaded in the first few years, though the difference is not substantial.
The polls and betting markets currently still point to a Democratic sweep or possible wave. With higher corporate taxes, so companies who benefitted from the 2017 Trump tax cuts like those in the energy, IT and consumer discretionary sectors will suffer. A Biden White House would also bring tougher regulations on industries like coal and fossil fuels, as well as on financials. Notably, these four sectors have a combined index weight of over 50% in the S&P 500.
The proposed increases in capital gains tax, potentially the largest in history, may also impact those sectors with the largest gains since the end of 2017, as investors look to lock in lower rates before the rise. IT and consumer discretionary, dominated by the FAANG stocks may be hit here with gains of more than 60% in that time. The tech giants are already facing regulatory and antitrust scrutiny from both Democrats and Republicans, so a blue victory/wave may not significantly change the landscape.
Two well-known planks of Biden’s policies are green energy and infrastructure spending, including 5G build-outs. This may benefit stocks like Tesla, not least due to their solar ambitions, battery production and negative emission technologies, while more traditional names like Honeywell should gain from plans to reduce emissions through greater energy efficiency.
Trump second term
The status quo would continue under another term of President Trump, with an equity-market friendly outlook. A pro-growth mix of tax cuts and deregulation would help financials and energy both because they are good gauges of economic growth and also the uncertainty of Biden regulatory changes would be eliminated. Names like Citigroup and Capital One are stocks which might find a bid in a relief rally, as there's less regulatory scrutiny and low corporate tax rates remain. Defence companies like Lockheed Martin may also enjoy a more supportive backdrop in Trump 2.0.
One important issue that will remain will be the elevated US-China trade tensions, that are at a much worse point than at the start of the first term. This is obviously a market headwind that wasn’t present when the initial ‘Trump Trade’ began. That said, any recurring volatility will be more than offset by the unprecedented stimulus that remains strong. Conversely any reduction in tensions may help companies like Apple which would benefit from a softening Biden tone and lower geopolitical risks.
Investor perception and policy priority will affect how stocks perform both before and after the election. Will equities struggle initially, as most commentators predict if a Blue Wave happens or looks inevitable? They should eventually recover if Democrats prioritise economic recovery. History tells us that the average return for US stocks is nearly double under a Democrat administration as compared to a Republican one. What’s most likely is higher volatility as this story plays out before and after the election. Any change in control in the White House is often also associated with higher equity market volatility. Ready to trade the opportunity?