Current polls point to Hillary Clinton being sworn in as our next President of the United States on January 20th. As far as what that means for policy, Clinton is a typical left of center Democrat, in a few ways more to the center than President Obama. With a handful of Senate races very tight, it’s impossible to tell if the Democrats will retake the Senate, and depending on how up to 5 toss-up races go control of the Senate is likely to hinge on 1 of those close races. The House is almost guaranteed to stay in Republican control. This is post is not partisan, I’m merely attempting to get my arms around how things might shakeout the morning after the election looking forward to power changes in DC and how that will affect stocks.
Let’s start with the hardest hit sector in the U.S. stock market, Biotech stocks. Clearly drug pricing has become a bi-partisan issue, but even if Clinton wins, and Senators Warren and Sanders are denied majority status or leadership roles when it comes to drug pricing in the new the Senate, it’s my view that a lot of bad news may already be priced in (our trade idea from Oct 21: Biowreck Check – IBB, XBI). The XBI, the S&P Biotech etf might have just held at important support, the uptrend from its Feb lows:
While bank stocks have under-performed the broad market by a smidge over the last couple years, the XLF, the S&P Financials Select etf has kept pace with the S&P 500 (SPX) so far in 2016, both up a bit less than 5%, with the XLF just 1% from its 52 week high:
With a Clinton win, comes a near certainty that the Federal Reserve will raise interest rates for only the second time since June 2006 at their Dec 14th meeting, which could propel bank stocks to establish a new range above the 52 week highs.
Fed Fund futures are pricing an 88% chance of a hike at their Dec meeting. The prospects for a rate raising cycle has caused the dollar to to rally towards the high end of the one year range, which pushed crude lower over the last few weeks. I suspect the Fed will not make the same mistake as they did last Dec when they raised, suggesting the possibility of 4 rate hikes in the coming year.
That said, despite rising rates of late, the S&P Oil & Gas etf remains range bound, with solid support in the mid $60s, with the possibility of oil stocks breaking from the tight correlation with crude:
Materials stocks, measured by the XME are showing signs of life after their 2015 crash, but also may be a tad range-bound, consolidating some of their 130% gains from their Jan lows. We wrote about this sector earlier (Metal Heads – XME).
Other rate sensitive sectors have been volatile as the 10 year Treasury yield matches levels not seen since June, which has put pressure on equity groups viewed as bond proxies like Reits, Utilities, Consumer Staples, U.S. Telcos. Homebuilders have been one of the hardest hit sectors in the last couple months, with the XHB, the S&P homebuilder etf down 6% on the year and down 13% from its 52 week highs.
Retail is a mess, it hardly bounced over the last couple days (read our trade idea from Friday on the S&P Retail etf, XRT – Retail Detail). We see lower lows after what we expect to be weak Q3 results and Q4 guidance from Department Store earnings this week, then big box retailers next. Do I hear $40 then $38?
Transport stocks measured by the IYT are approaching a new 52 week high:
Industrial stocks (XLI) have maintained their out-performance, up 11% on the year, more than 2x that of the SPX, and less than 2% from a 52 week high.
And lastly Technology. I suspect this sector to be the single largest beneficiary from a Clinton presidency. First things first, as I stated yesterday in a post I’m With Them, from c-level executives to venture capital investors, tech peeps have not only re-soundly supported Clinton, but almost unilaterally rejected Trump’s rhetoric, and stated worries about risks to technological innovation emanating from a less inclusive and welcoming U.S:
Back in July, 145 technology leaders, stated in a defiant open letter, denouncing Trump’s candidacy:
We are inventors, entrepreneurs, engineers, investors, researchers, and business leaders working in the technology sector. We are proud that American innovation is the envy of the world, a source of widely-shared prosperity, and a hallmark of our global leadership.
We believe in an inclusive country that fosters opportunity, creativity and a level playing field. Donald Trump does not.
Mark Cuban, Web 1.0 luminary, star of Shark Tank and owner of the Dallas Mavericks and early Twitter and Uber investor Chris Sacca who runs LowerCase Capital have been massive Clinton backers, especially since Trump won the nomination last Spring. Meg Whitman, former Republican nominee for Governor of California in 2010, and CEO of Hewlett Packard has been a prominent Clinton surrogate, with very public backing from Salesforce CEO Marc Benioff, LinkedIn co-founder Reid Hoffman, Facebook’s COO Sheryl Sandberg and considerable financial giving from rank and file employees of the top tech outfits.
It’s been rumored that Clinton would want Sheryl Sandberg, COO of Facebook to be Treasury Secretary. That could pave the way for the nearly $1.5 trillion in U.S. tech cash overseas to find its way back with some sort of Tax Amnesty. This would be sold as an effort to put the money to work in the U.S., and thus creating jobs. Much as Obama has done, I suspect Silicon Valley’s support for Clinton will not be forgotten and the Clinton administration will be friendly to an industry who’s reach is growing within almost every other major industry.
But what if the polls are wrong? If Trump wins, then everything probably goes down like we saw across financial markets post Brexit in late June. Maybe the dollar goes up, as a sort of flight to protectionist quality, but normal safe havens like U.S. Treasuries might not. Stocks will be sold and are not likely to come back with in days as they did post Brexit. For longer term trends it makes sense to consider the continued weakness in the British pound (discussed this am – Wall Street, Main Street and the Beltway).
I’m just laying it out so you can play it out. Watch for leadership roles being announced in the Senate and the House and various appointments to head federal agencies and other Czars over the next month or so. The one wild card as I mentioned this morning is if we don’t know who controls the Senate for some time, which is possible is any of these races go into a recount. In that case, just when you though this bizarre election was over, it pulls you, and the markets right back in.