Digesting the debates

A perspective from E*TRADE Securities 10/15/20

With only weeks left until Election Day, politics may be top of mind for many investors. And it stands to reason, as the publicity surrounding the campaign trail has been turbocharged by a chaotic first presidential debate, a cancelled second debate, questions of a contested outcome, and a coronavirus outbreak in the White House (not to mention the social media frenzy over a guest appearance by a certain fly).

To be sure, if we take the debates staged to date, not much—if anything—has been said by way of policy for investors to hang their hats on. And further, the reality is that the outcome of this election is unlikely to affect the long-term performance of any well-balanced investment portfolio. (Consider that the market has generally followed an upward trajectory and delivered positive returns under both Democratic and Republican presidents.) But that doesn’t mean there aren’t potential shorter-term angles.

Still interested in making investing moves based on the election? One approach to consider is a core–satellite model, where the core of a portfolio remains mapped against individual goals, risk tolerance, and time horizon, while a satellite portion is dedicated to potentially capitalizing on unique factors like the election.   

With the final debate currently scheduled for October 22, now may be as good a time as any to evaluate the candidates’ economic outlooks and possible policy initiatives, and their potential implications for the market—keeping in mind that what a candidate says during a campaign can be different than what they do when in office.

Themes for a Trump presidency

Despite ongoing trade disputes with China and a pandemic-induced economic recession, the market, by and large, performed very well in President Trump’s first term, and some investors may anticipate more of the same if he were to get re-elected. Here are some areas that may benefit from a second Trump term, based on the administration’s actions over the last four years and its campaign promises for the next:

  • Small-cap stocks: A linchpin of Trump’s presidency has been the Tax Cuts and Jobs Act, which lowered taxes for corporate America. A continuation of market-friendly tax and regulatory policies, along with a sustained economic recovery, may be especially beneficial for small-caps—which tend to be cyclical, meaning their businesses usually ebb and flow with the economy. 
  • Traditional energy: President Trump is a big proponent of America’s energy independence. He has broadly rolled back restrictions on oil and gas industries put in place during the Obama administration.1 That said, energy has been the weakest sector in the S&P 500® since Trump took office. Still, this sector is likely to face less regulation under Trump’s policies than Biden’s.
  • Defense: The current president’s fiscal policies have promoted spending in the areas of national defense and strengthening America’s borders over the last four years. An ongoing commitment to military spending may be favorable for defense stocks.

Themes for a Biden presidency

Former VP Joe Biden’s campaign has advocated for higher corporate and top-tier personal tax rates, and a sustainable economy geared toward achieving net-zero carbon emissions. Here are some areas of potential opportunity should power shift in the Oval Office:

  • Clean energy: Biden’s proposed $2 trillion plan to modernize American infrastructure and energy could create potential tailwinds for green alternatives.2 (Green energy stocks have, in fact, been on a tear this month.) The plan calls for an extensive overhaul of roads, bridges, buildings, electricity, and water infrastructure to help combat climate change.
  • Municipal bonds: Potential tax increases for high earners may push investors to consider municipal bonds, raising prices and lowering yields. In addition, many analysts believe a Democratic presidency would result in a larger federal stimulus package, increasing aid for cities and states that were hit hard by coronavirus outbreaks, and helping shore up the finances of some muni issuers. 
  • Large-cap stocks: A Biden presidency that results in higher corporate taxes and stricter regulatory policies may be less onerous on large-cap stocks that derive considerable income from overseas business.

Considerations for either candidate

One area that has been highlighted on both sides of the campaign trail is infrastructure. While Biden’s platform has focused on the need to build modern, green infrastructure, the Trump administration has floated various trillion-dollar infrastructure plans to Congress since 2018.3

Here’s how the S&P sectors have stacked up under the last four presidents:

Source: E*TRADE Capital Management, Morningstar; *Returns through 7/31/20; **Real estate index launch date was 9/19/16


Also, in the aftermath of historic levels of monetary stimulus and what looks like at least a few years of near-zero interest rates, whoever occupies the White House may be faced with a US dollar that continues to weaken, and the longer-term prospect of damaging inflation. A weak dollar, though, can benefit international stocks as well as US stocks with significant overseas revenues.

The bottom line

While either candidate’s presidency may present unique opportunities and risks to consider over the next four years, investors shouldn’t lose sight of the bigger picture. After all, history suggests the stock market’s longer-term course is unlikely to be changed by the party affiliation of the sitting president.

As for the possibility of a contested outcome, investors should remember that volatility associated with the election will likely be a limited disruption, and the best approach may be to tune out the noise. Elections can create the perception of uncertainty in the markets, but the bottom line is that we will, ultimately, have a resolution.

There may still be one more debate on the horizon, but don’t pin hopes on hearing something substantial when it comes to investing. Rather, the tried-and-true strategy is to keep the core of all decisions mapped to personal timelines, long-term goals, and risk tolerance.

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  1. Reuters, “Factbox: U.S. oil and gas regulatory rollbacks under Trump,” 8/29/20, https://www.reuters.com/article/us-usa-climate-regulations-factbox/factbox-u-s-oil-and-gas-regulatory-rollbacks-under-trump-idUSKCN1VJ2BP
  2. CNBC, “Joe Biden unveils $2 trillion green infrastructure and jobs plan,” 7/14/20, https://www.cnbc.com/2020/07/14/joe-biden-unveils-green-jobs-and-infrastructure-plan-during-2020-election.html
  3. WhiteHouse.gov, “Building a Stronger America: President Donald J. Trump’s American Infrastructure Initiative,” 2/12/18, https://www.whitehouse.gov/briefings-statements/building-stronger-america-president-donald-j-trumps-american-infrastructure-initiative/

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