With the most unconventional election in modern American history drawing to a close, the global financial markets are betting on more of the same — a Democrat in the White House kept in check by Republicans in Congress. Given all of the October surprises, investors may be ill-prepared for another on Nov. 8.
Renewed controversy over Hillary Clinton’s e-mails “is not likely to cause a fundamental shift in the presidential race,” analysts at Evercore ISI said in a report dated Oct. 30. The biggest shock would be a victory by Republican Donald Trump or a sweep by the Democrats. Either could send investors running for cover into the safest government bonds, U.S. dollars and the yen and fleeing from riskier equities and emerging markets, much like the aftermath of the U.K.’s June vote to leave the European Union. Beyond that, both candidates want to increase spending and cut taxes which would be bullish for stocks and bearish for fixed income.
Below is a look at potential winners and losers depending on who wins and loses. But first, a caveat. Investors’ immediate reaction to U.S. elections often doesn’t last, as shown by this chart:
Clinton Wins: “The market has already priced in a Clinton victory,” Margaret Yang, a CMC Markets analyst in Singapore, said by phone. “Any upside will be limited if she wins.” Barclays PLC said in a report this week that the S&P 500 Index could gain as much as 3 percent if she wins.
The biggest losers would be finance and drug companies.
“A potential Democratic sweep would represent one of the toughest election outcomes for banks,” Morgan Stanley Research said in a report, citing the possibility of tougher rules and tax changes that might hurt companies like Goldman Sachs Group Inc. and JPMorgan Chase & Co.
Moves against carried-interest rules that benefit asset managers, also targeted by Trump, would hurt firms including Janus Capital Group Inc. and Waddell & Reed Financial Inc.
Under Clinton, pharmaceutical and biotech stocks “could be hit by renewed pressure to curb price increases on drugs,” BlackRock Inc. researchers said in a report, noting her complaints about rising prices. Citigroup Inc. cut its rating on the European health-care industry to underweight in September, citing risks related to the election. Drugmakers Novo Nordisk A/S and Roche Holding AG have trailed the broader market this year as Clinton’s prospects rose, with the shares gaining only during times when her polling numbers fell.
Hospital operators and Medicaid providers such as HCA Holdings Inc. and Universal Health Services Inc. may benefit from continued Affordable Care Act subsidies, according to analysts from Strategas Research Partners, LPL Financial Holdings Inc. and Credit Suisse Group AG.
Her plans to reduce dependence on fossil fuels would boost alternative energy producers, with Morgan Stanley touting the prospects of Sunrun Inc. and NextEra Energy Inc. with the Democrat in the White House. Strategas also likes First Solar Inc. under Clinton. Evercore’s report adds General Electric Co., Tesla Motors Inc., SolarCity Corp. and Exelon Corp. to the list.
Trump Wins: “Valuations of U.S. equities are quite high, and a Trump victory will trigger a massive selloff,” CMC’s Yang said. Many would consider that a classic “ black swan event,” she added, so the reaction would be “much more severe” than Brexit, which caused the S&P 500 Index to fall 5.3 percent in two days as benchmarks in Europe and elsewhere lost even more. Investors seeking haven in the yen would be “a negative for Japanese exporters,” Yang said.
Barclays predicted the S&P 500 would nosedive by between 11 percent and 13 percent if Trump wins.
The Republican’s shifting policy positions make his longer-term impact on particular sectors harder to assess. BlackRock’s analysis of the correlation between the two candidate’s polling numbers and sector stock performance suggest drugmakers, insurers and banks are expected to do better under Trump. Bloomberg News did a similar analysis for individual U.S. stocks.
Though finance companies may prefer Trump, BlackRock warned that repealing the post-crisis Dodd-Frank law, derided by the industry’s Republican allies, may result in “simpler and blunter but equally onerous rules.” Almost all sectors of the health care industry, from device-makers to providers, would benefit under Trump, BlackRock said.
Companies that build and maintain civil infrastructure, such as Caterpillar Inc. and Ingersoll-Rand Corp., would have bigger opportunities for government work under Trump, given that his plans for such spending are much more ambitious than Clinton’s. The same holds true for military contractors, according to a Credit Suisse report.
Morgan Stanley sees NRG Energy Inc., which uses coal to produce electricity, benefiting under a Republican White House, due to less regulation and slower growth in the use of renewables.
Trump Wins: In the two weeks after the U.K. gobsmacked pollsters and voted to leave the EU on June 23, the U.S. benchmark 10-year yield fell 39 basis points and didn’t return to pre-Brexit levels until September. Something akin to that would happen if Trump defies conventional wisdom, analysts said. Credit Agricole SA predicts a “massive disjoint” that would send 10-year yields down at least 10 basis points if he prevails.
After the dust settles, Trump’s tax cuts and infrastructure-spending plans may drive yields back up, especially if Republicans hold both the House and Senate. That impact could be exaggerated if the Republican’s isolationist foreign policy prompts countries with large Treasury stakes to unload them, Credit Agricole analysts said. Fiscal largess would also benefit inflation-linked bonds, which already are outperforming nominal securities this year.
Yields would only remain flat under Trump, according to Bank of America, in the unlikeliest event of all: President Trump finds himself up against Democrats controlling both houses of Congress, because they would resist his massive tax cuts.
Trump’s support for fossil fuels could spur a rebound for energy industry bonds, especially high-yield ones, after two years of major losses in the commodities slump, Wells Fargo & Co. said in a report. As for munis, “Trump’s plan to slash personal tax rates could deal a blow to the asset class,” BlackRock’s report said.
Clinton Wins: A victory by the Democrat would initially drive up yields as investors sell off Treasuries in favor of riskier assets, Bank of America Corp. analysts said in a report. Ripple effects would raise borrowing costs for individuals and corporations worldwide because U.S. sovereigns are the global debt benchmark.
Yields on 10-year U.S. bonds have risen as much as 36 basis points since Clinton’s lead over Trump started widening in late July, and the bank’s analysts called the Democratic Party’s improving prospects “a major factor” behind that move.
Over the longer term, a Clinton victory would do little to yields — as long as Republicans retain control of at least one chamber of Congress — because her fiscal stimulus would be relatively small, especially compared to Trump’s plans for bigger tax cuts and more infrastructure spending. A Democratic sweep would likely result in more spending and drive yields higher.
Municipal debt could gain under Clinton because any increased taxes she imposes on the wealthy would make tax-free bonds more attractive, BlackRock said.