Beyond the presidential vote, the House and Senate hang in the balance … what different outcomes could mean for the market … how to protect yourself from chaos
If you’re worried about the presidential election having a lasting negative impact on your portfolio, don’t be.
Sure, it might get a little bumpy, but the long-term trend for the stock market continues to point up.
Instead, now is the time to focus on which stocks you should be investing in.
That was Louis Navellier’s advice to investors, which we detailed in Monday’s Digest.
In short, Louis expects some market-bumps if Biden wins. This is primarily due to Biden’s unclear tax policy as it affects dividends and capital gains.
On the other hand, if Trump wins, Louis expects a relief rally.
Yet regardless of who takes the White House, Louis sees the stock market eventually climbing higher for two main reasons — a weakening dollar and our zero-interest rate environment.
But let’s back up …
Between now and “eventually” could take a while.
So, what if you’re an investor who is concerned about those shorter-term bumps Louis references? For example, the recent dollar-rally that is creating a bit of a headwind for stocks?
What if you’d like more details on how the market might react to the outcomes of various elections?
And note I wrote “elections.” That’s because it’s not just the presidency that will be decided.
As our income specialist, Neil George, highlights in his latest issue of Profitable Investing …
The House, Senate and the White House are all in play in the general elections, and the results could be as important for the economy and markets as the results of the 2016 general elections.
In Neil’s issue, he digs into the investment implications of not just who wins the presidency, but also which party takes control of the House and Senate.
So, in today’s Digest, let’s dig deeper into election analysis and what it means for your portfolio, this time with Neil’s help.
***The hand of the government can be a help or a hindrance
Neil begins his analysis by noting how the government is the single-largest component of the U.S. economy. That’s when measured by spending as a percentage of gross domestic product (GDP).
The impact of this is simple — its spending and legislative policies can either be a major help or hindrance to the economy, as well as specific sectors within the economy.
In analyzing possible government spending and policy through potential election outcomes, Neil begins by writing that a Republican sweep of the White House, Senate, and House isn’t likely to happen.
A Democratic sweep is more likely, which could mean a variety of legislation impacting your wealth.
From Neil:
Tax code changes will be front and center. This starts with a big increase in corporate tax rates.
Recall that the Tax Cuts & Jobs Act of 2017 (TCJA) was a big boost to earnings of US corporations, which set off the run-up in the S&P 500.
The potential increase in rates from 21% to 28% as discussed on the campaign trail will hit earnings.
In turn, the compiled positive expectations discussed (which Neil discussed earlier in his issue) will be reversed and both the tech-weighted S&P 500 and the unweighted index will be impacted negatively.
In addition, with a major percentage of the US workforce working under passthrough entities, reversals of tax provisions of the TCJA would also be expected. This would provide challenges to professionals, tradesmen and contractors in the economy.
But such single-party control would also steer huge federal dollars toward certain sectors, aiding select investments.
For example, Neil writes that healthcare rules and regulations would be another legislative target.
Despite the Supreme Court decisions limiting parts of the Patient Protection & Affordable Care Act of 2010 (ACA), Neil believes we would see legislation to expand Medicaid. He thinks we’d also see further mandates on insurance.
As an investor, you could play this by looking toward leading healthcare providers that operate within the ACA. One possibility Neil references is Centene (CNC). Other beneficiaries would be contractors for Medicaid and Medicare.
Neil also highlights the potential for mandates for green energy, as well as restrictions on fossil fuels. This would hurt oil patch stocks, but would help ESG stocks (environment, social, and governance).
Back to Neil:
Renewable energy is a significant part of the business for ESG-friendly utilities.
Government incentives led many utilities to enter and expand in renewable energy. And state and local governments have been mandating increasing use of renewable energy as a percentage of power generation.
This has led the poster child of the ESG utility market, NextEra Energy.
We’ve featured NextEra several times in the Digest. It’s one of the largest wind and solar power companies in the world.
Yielding 2.1%, NextEra is a “buy” for Neil up to $285.50.
***What if there isn’t a single-party takeover and we see more gridlock?
Back to Neil for that answer:
Another possible scenario is that the House stays in current control, the Senate stays in current control and the White House changes.
This would mitigate legislative change risk. And the Senate would slow down lots of White House initiatives and appointments.
For many in the markets, this scenario has a lot of appeal, as it would provide for a locked government.
Despite this locked government, Neil believes that fossil fuels would still suffer, while ESG investments would benefit.
He also suggests that financial stocks that are subject to government regulation would be in the gunsights in this scenario.
Another situation to analyze is if the House stays as-is, yet the Senate flips to the Democrats. Meanwhile, the White House stays under Trump.
Here’s Neil with his take:
… look for no legislation and a constant barrage of attacks lobbed at the White House.
Finally, what if Trump wins and the House and Senate remain as they are today?
If the House and Senate stay the same and the White House stays, then we have status quo.
Recovery in the economy, tax code and projected earnings cases stay intact.
Under that situation, we’d cross fingers for an expedited vaccine, the continued re-opening of our economy, and an earnings-rebound that helps stocks grow into today’s above-average valuations.
***The biggest short-term risk
Regardless of who wins the presidency, there will be plenty of unhappy people.
However, there would be a benefit in a clear winner. Specifically, we would have the information needed to make whatever portfolio changes we deem appropriate.
The greater concern is that we have no clear victory, instead, just chaos.
From Neil:
… one of the big risks in the near term is that election results will take time given so much remote voting.
Contested results, with both parties already heavily lawyered up, and street protests are real possibilities.
This will not be well received in the stock market.
You may recall from Monday’s Digest that Louis also pointed toward this as a worst-case outcome:
There’s no denying that a contested presidential election will definitely throw a “wrench in the works,” further weaken the U.S. dollar and likely trigger a stock market selloff.
The worst possible scenario is that President Trump appears to win the electoral college but then loses several days later as absentee ballots are counted.
Both sides will then contest the presidential election results, which means the Speaker of the House, Nancy Pelosi, will become the next president in January.
So, what’s one way to protect your portfolio from this chaos?
Here’s Neil’s take:
The antidote is already inside the model portfolios.
Gold.
Specifically, Neil likes the gold-miner, Franco-Nevada (FNV). Neil likes it under $151.75.
But that’s not your only portfolio-insurance option:
… bonds remain the other major haven both in the near term as well as into 2021 regardless of the election outcomes …
… bonds will be the best lower-risk choice for better adjusted return opportunities.
Yields are attractive for corporate and municipal bonds. And with continued demand, gains are still in the works for prices while you get paid nice coupon and dividend payments.
One bond option Neil likes, which incorporates the ESG investing we discussed earlier, is the iShares ESG Aware USD Corporate Bond ETF (SUSC).
Neil writes that for the trailing year, the ETF has returned 9%, which tops the general US Aggregate Bond Index.
Wrapping up, even if the stock market tumbles during the election, it will recover eventually. Of course, there’s a lot of room for volatility between now and “eventually.”
If that has you concerned, consider the investments we’ve highlighted today as ways to hedge against market chaos — or even as a way to benefit, depending on the outcome of the upcoming elections.
Have a good evening,
Jeff Remsburg
