With Donald Trump trailing Hillary Clinton in the polls over the summer, investors have largely decided that November’s election will be a non-event from a market perspective. Next week’s Federal Reserve meeting is considered the more significant event but, with volatility tending to rise in the weeks running up to major votes, and with both candidates’ health now in the spotlight, we should expect the race to the White House to come into sharper focus. In particular, the first presidential debate in just over a week will shine the spotlight on policy.
Most observers believe that a Clinton presidency is the more likely outcome. Citi’s political analysts recently put the odds of a Democrat victory at 65pc. That, however, makes a Trump win a non-negligible 35 per cent shot. That is hardly a tail-risk and so investors really do need to weigh up the impact of both possible results. Despite the recent polls, this is an extremely unpredictable election in which neither candidate is viewed favourably by a disengaged and disillusioned electorate.
As Goldman Sachs has pointed out, the likely ramifications of the policies articulated by both candidates need to be viewed through a probability prism. If there is no prospect of the more outlandish policies actually being implemented, then there’s not much point basing an investment decision on them. For that reason it makes sense to focus on the issues where the two candidates broadly agree with each other and where implementation is not dependent on one party winning both the White House and a majority in Congress.
‘Violently agree’ on some things
Top of the shared agenda is higher government spending after the election. Both Clinton and Trump have called for increased spending on infrastructure and higher investment in defence. Clearly there is a lag before this shows through in the data, but certainly by 2018 this is likely to lead to higher GDP than would otherwise be the case, stronger company earnings in certain sectors and probably an acceleration in the normalisation of interest rates and a stronger dollar.
Sectors that would benefit from this include defence stocks, construction and engineering. It probably favours more cyclical industries and would add to the underperformance so far this year of more defensive sectors, like utilities and consumer staples. Companies that derive a high proportion of their revenues from the Government are an obvious hunting ground for beneficiaries, but other policy differences may get in the way of this simple logic. Healthcare companies are the clear exception, with Hillary Clinton having already laid down the gauntlet to the biotech and pharma sectors, over what she views as excessive drug prices.
Both candidates are also pretty aligned on the need for tax reform, although the details differ. Trump’s proposed corporate and personal tax rate cuts are more aggressive, but both wish to reduce the amount of profits and so tax revenues that companies are parking offshore. Companies with low effective tax rates look vulnerable to any post-election clamp-down on avoidance.
Another area where Trump and Clinton are singing from the same sheet is their dislike of existing and proposed trade deals. Protectionism, together with expected robust economic growth and a stronger dollar, points towards domestic-facing companies. This is doubly so, Goldman suggests, because these companies trade at a lower valuation multiple than their international peers.
The final area where the two candidates are violently agreeing with each other is on America’s minimum wage. Trump favours $10 an hour, Clinton $12. In both cases this would represent a significantly higher burden for big employers of low-wage workers, albeit there would be an offset from higher disposable incomes.
History not much of a guide
What about areas of difference? The most obvious of these is the energy sector where Clinton’s enthusiasm for renewables contrasts with Trump’s plans to eliminate drilling restrictions. In financial services, too, a Trump presidency promises less regulation whereas Clinton, with an eye on the Bernie Sanders faction that gave her such a run for her money, would probably be inclined to squeeze the banks.
Looking further afield, the emerging market rally so far in 2016 is vulnerable to a Trump victory if it leads to a general reduction in risk appetite, a stronger dollar and higher interest rates. The Republican candidate’s rhetoric in the campaign so far suggests a reduction in trade with both Mexico and China while heightened geo-political risks would be unhelpful for Korea and Taiwan.
For the equity markets as a whole, history does not provide much guidance. In the 21 elections since 1932, the S&P 500 (from which the rest of the world will no doubt take its lead) has risen in the first month after the vote roughly half the time. In the three months after the election, the outlook is a bit better – Wall Street has risen nearly two thirds of the time. Democratic victories are generally a bit better for markets and investors prefer continuity (of President or party).
