With polls still indicating that a Clinton win and split government are the most likely outcomes, we have witnessed increased complacency around election results. But, as BofA warns, risks to market multiples and to earnings growth are typically elevated in an election year, with volatility generally rising ahead of the election, and business investment typically slowing as corporations adopt a wait-and-see attitude.
Moreover, given how polarized the candidates are in the current contest, we should not rule out the possibility of an uncertainty shock in the case of a Democratic or Republican sweep, increasing the likelihood that more policy proposals are passed. At a simplistic level, the risks of a Democratic sweep are higher taxes and increased regulation; under a Republican sweep, trade wars, geopolitical risk and a higher budget deficit. And a sweep by either party suggests greater potential for fiscal stimulus, leading to stronger growth and thus higher rates, which could be detrimental to high dividend yielding stocks.
The incoming president’s impact is likely to be heavily constrained by a split government. A Clinton Presidency with Republicans controlling at least one house of Congress would likely make Clinton's upper income tax hike and legislation limiting drug prices less likely to pass. Rates could remain lower for longer (under a lower probability of significant fiscal spending), benefiting stocks with high dividend yields. Under either candidate, we see a high risk that the Trans-Pacific Partnership (TPP) does not pass and that the US Treasury could name China or another country a “currency manipulator.” Military spending is likely to increase under either candidate, which could benefit Defense stocks. Under a Trump Presidency with Democrats controlling at least one house of Congress, some restrictions on immigration might be imposed, per the candidates' policy positions, but a major policy shift appears unlikely. A tax cut for the wealthy would be less probable, and only small changes in the Affordable Care Act would be likely.
With the election drawing nearer, BofA surveyed their US fundamental analysts to come up with lists of stocks that could benefit in the four general election scenarios: Clinton sweep, Clinton/split government, Trump sweep, and Trump/split government…
Given the proximity in time to the election, the most likely outcome may be partially priced in. Thus, it may be overly simplistic to sell Health Care under a Clinton win when the sector has already de-rated…
Or buy stimulus beneficiaries when these stocks appear to be discounting lofty expectations…
Note that the number of news articles citing fiscal stimulus reached a post-crisis high this summer.