4 Ways that the Presidential Election Will Affect Your Portfolio
By Anthony Jerdine| November 8, 2016 — 06:41 AM EST
The 2016 U.S. presidential election will impact your portfolio in at least four ways. Review these catalysts and take action now to reduce or avoid losses that can be predicted through current campaign rhetoric. It’s also a good time to add exposure to securities and sectors that may benefit from policy changes that occur after this quadrennial event.
The election will impact markets before and after the November vote, with the campaign trail exposing individual sectors to buying or selling pressure while the final result produces a longer lasting effect on a smaller group of securities. Price action in both groups should track poll numbers, allowing observant investors to make on-the-fly adjustments to portfolios.
Ironically, Wall Street is unlikely to become a major campaign issue, despite its participation in the 2008 economic collapse. A 7-year bull market and huge fines have impacted the political landscape, with neither party willing to challenge major investment banks, beyond an occasional reference or a slap on the wrist. Expect a cynical response to any rhetoric that promises stringent financial regulations in a new administration.
The U.S. presidential election will impact health care stocks, with Republican front runners looking to repeal or limit the Affordable Care Act a.k.a. Obamacare. Democratic candidates may add to the negative impact, as we saw in 2015 when frontrunner, Hillary Clinton criticized the high cost of prescriptions, setting off a biotech and pharmaceutical decline that’s continued into 2016.
The U.S. healthcare industry has undergone a dramatic consolidation in recent years, highlighted by the recently approved merger between Anthem (ANTM) and Cigna (CI). Meanwhile, Aetna (AET) has announced it will buy Humana (HUM), in a transaction that’s still awaiting regulatory approval. These mergers will improve profitability, regardless of political activities in coming years, suggesting that selloffs generated by tough talk on Obamacare should be viewed as buying opportunities.
Barrack Obama’s election underpinned alternative energy sources while placing a target on the backs of the coal and other fossil fuel industries. Republicans will seek to ease the Clean Air Act and other environmental restrictions, breathing life back into these groups. Solar may have sidestepped campaign partisanship with a late 2015 agreement to continue subsidies past a 2017 expiration date but expect the group to get sold if Republicans take back the White House.
Collapsing crude oil prices will have an indirect impact on the campaign trail because both candidates understand that lower pump prices put money back into the hands of consumers. However, energy companies traditionally back Republican candidates, seeking to reduce regulations that limit profitability, and it’s expected they’ll be active contributors in the 2016 race.
The industry has been badly hurt by falling prices and will seek accommodation to underpin energy markets. The lifting of the crude oil export ban completed a major agenda item, but its political and economic importance has dropped significantly because WTI crude on this side of the Atlantic is now priced identically to Brent crude on the other side, making exports unlikely, especially during a record supply glut.
The November 2015 Paris attacks highlight the global impact of terrorist organizations and current geopolitical concerns. “Boots on the ground” has become a notable theme heading into the 2016 campaign season, raising odds the USA will intervene to a greater degree in Middle East military operations in coming years.
Defense stocks took off in strong rallies after Paris and continued to lead the market in early 2016. Polls that favor Republican candidates should underpin this rally, but it’s likely that Democrats will also talk tough on war and defense, given the threat of ISIS, China’s South China Sea ambitions and the always unpredictable North Korea.
In addition to broad themes in line with Democratic and Republican policy formation, economic cycles also tend to peak heading into or during an election year, often posting significant tops or bottoms that set the stage for new bull or bear markets. We saw that happen in 2000 and 2008, with both tops giving way to significant declines.
Historical data also reveals significant market performance variations, depending on which party takes the White House. The DJ Industrial Average performed significantly better between 1900 and 2012 and better under Democratic administrations than Republican administrations. The average monthly return under Democrats during this period was 0.73% versus 0.38% for Republicans. Also, Democrats posted an average yearly return of 15.31% vs. 5.47% for the GOP.
The Bottom Line
Review portfolios in early 2016, looking to mitigate losses due to the presidential election. Also, take the time to add new exposures that could benefit, depending on the outcome. Healthcare, pharmaceutical, energy and defense stocks could be impacted during the year, as campaign statements translate into buying and selling pressure. Health care and defense should exit the presidential election year as winners, regardless of which side takes the White House.