U.S. elections are largely over, at least for casting votes. And results are coming in around the nation, with plenty of vote processing still up in the air in local, state and national elections. There is still a lot to be determined. And recounts and disputes — especially disputes — will be ramping up at least in demand by both sides of the political aisle. Both sides were lawyered up and then some, and the legal fees will be spent and earned over coming days.
Right now, some hours into the day after, it appears that the White House is still in electoral flux on both a popular and assumed electoral college basis in several states. The House is set to remain in current control — but with diminished leadership, as for now it appears that current leadership has lost five seats while the opposition has gained five seats. The Senate appears to remain in current control including for the majority leader.
The stock and bond markets are fully embracing the results — or lack of results. The S&P 500 Index is up by 2.4% with technology, healthcare, communications and consumer stocks leading the way with gains even higher than the average. Materials, industrials, financials and defensive utilities are neutral to just off a smidge.
Bonds are booming. Treasuries are rallying in price and dropping in yield and corporates, municipals and other credit sectors are all finding buyers.
The dollar as measured by the Bloomberg U.S. Dollar Index is down, as cash is not in demand as it is being spent on stocks, bonds and other securities.
And gold is also off, since opportunity costs to be in gold over stocks, bonds and other assets is too high to warrant buying the yellow metal.
Here’s How I See Things for Stocks
Let’s assume a change in the White House for a moment. This would result in changes across all of the Federal agencies. Traditional financials should be casualties, as any further regulatory reforms will be tossed. And more demands on lending and investment as well as general operations will become more costly in terms of capital and compliance.
This means that U.S. bank stocks that were already not in the best of shape should be avoided. The KBW Bank Index (BKX) has already been a non-performer.
All U.S. banks should be avoided or sold. Instead, look at my alternative financials (alt-financials) that provide corporate and business lending without the regulatory woes of traditional banks. Two of my favorites remain in Sixth Street Specialty Lending (NYSE:TSLX) and Main Street Capital (NYSE:MAIN).
Both of these companies have much better net interest margins (NIM) that measures the cost of funds against earning assets. And the same is the case in efficiency ratios, which measure the percentage of cost for each dollar of revenue. The higher the efficiency ratio, the higher the cost of revenue and the lower the ratio, the greater the potential profits are for the company.
And both are high-yielding stocks that come with some added tax advantages.
Energy companies will come with some mixed potential impacts. Potential agency restrictions on exploration and production (E&P) on federal land will be problematic for some companies. And pipeline permits will be scarce to none. But in turn, limiting some E&P may work to bolster oil and gas prices which may aid companies with their own land in highly favorable states such as the Permian Basin in Texas.
I recently update my view on asset values and cash flows for Viper Energy (NASDAQ:VNOM) which is a landlord that leases out land in the Permian and just collected royalties. This is a very interesting company post elections.
The other side of energy is power generation. And here I have been ramping up my calls to buy and own more ESG (Environmental, Social & Governance) companies, particularly in the utility space. An agency change will only further charge up this push for green energy. This makes for a better argument to buy and own NextEra Energy (NYSE:NEE) as one of the largest wind and solar power producers in the US and globe.
Technology has been a highly valued sector of the stock market — but is getting more traction. I remain focused on companies that continue to work well with the realities of how businesses and households work.
Microsoft (NASDAQ:MSFT) with its cloud and subscription software will continue to deliver and should be bought and owned.
Healthcare is a highly charged and challenged market segment. And with the Senate remaining in current control, look for little to change for the sector in terms of government policy. That said, one of the most defensive of the healthcare stocks is Medical Properties Trust (NYSE:MPW) that owns healthcare properties that are near fully leased with tenants that have been and keep paying. And it yields a good dividend.
The big overriding benefit to all stocks in the U.S. is that with the Senate remaining in current control — the reversal of the Tax Cuts & Jobs Act of 2017 (TCJA) complete with major tax hikes will go away for a while.
Here are My Thoughts on Bonds
Massive additional stimulus spending will not be on the agenda in a massive amount as feared by Treasury investors. This will mean less supply issues of government bonds aiding Treasuries as well as the overall bond market. This should continue the path for bonds overall to fare well in the coming months with little to no real inflation threats and eager investment demand.
I continue to see corporate and municipal bonds as the best places for further growth and income from the bond markets. For corporates, run by BlackRock (NYSE:BLK) is the BlackRock Credit Allocation Income Trust (NYSE:BTZ). Yielding well now and at a discount to net asset value (NAV), it is a great buy post elections.
And for municipals, state and local borrowers are already largely in much better financial shape with very select exceptions, such as the state of Illinois. And with threats of tax increases potentially impacting the local economies, they should continue to remain in better shape. One of the best muni funds is the Nuveen Municipal Credit Income Fund (NYSE:NZF). This provides a massive tax-advantaged yield and trades at a nice discount to NAV.
Now, things still remain in flux in the results and official results post recounts and reviews. But there is another bit of political drama coming up on Dec. 11. This is when the Continuing Resolution (CR) expires funding the U.S. Federal Government. I see a very good possibility for a lame-duck Senate balking at passing a further CR for political reasons. This would mean a shutdown that may well garner a new round of political news and market action that I will be following.
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As the editor of Profitable Investing, Neil George helps longer-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.