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Electoral Risks & Beneficiaries

October 01, 2020

One of the biggest potential threats to the stock market is the elections on Nov. 3, even as many around the nation have already voted or shall do so ahead of that fateful Tuesday.

The House, Senate and the White House are all in play in the general elections, and the results could be as important for the economy and markets as the results of the 2016 general elections.

I have always watched elections and, more importantly, legislative and executive activities when it comes to the markets and individual stocks and bonds. The government is the single-largest component of the US economy, as measured by spending as a percentage of gross domestic product (GDP), and the hand of government can either be a major help or hindrance.

Since I’ve been in the markets through quite a few elections, I have learned that instead of worrying about the outcome, it’s best to hold companies that can thrive regardless of the political winds. While politics is exciting to follow, making money is a much more fulfilling endeavor.

That said, here’s what I can glean from where we are now.

Single-party control of the House, Senate and White House can be either a major help, or nothing but trouble. This is the uncertainty risk in the market, as single-party control means that legislation will happen in 2021-2022. Republican sole control is not likely by my reading, but Democrat control could mean a variety of legislation.

If there’s a big Blue sweep, tax code changes will be front and center. This starts with a big increase in corporate tax rates. Recall that the Tax Cuts & Jobs Act of 2017 (TCJA) was a big boost to earnings of US corporations, which set off the run-up in the S&P 500.

The potential increase in rates from 21% to 28% as discussed on the campaign trail will hit earnings. In turn, positive expectations will be reversed, and both the tech-weighted S&P 500 and the unweighted index will be impacted negatively.

In addition, with a major percentage of the US workforce working under passthrough entities, reversals of tax provisions of the TCJA would also be expected. This would provide challenges to professionals, tradesmen and contractors in the economy. Of course, it will take time to get these things done, so the impacts may well be delayed.

Healthcare rules and regulations will be another legislative target. Despite the Supreme Court decisions limiting parts of the Patient Protection & Affordable Care Act of 2010 (ACA), I would expect legislation to expand Medicaid as well as further mandates on insurance.

We are already ahead of this with Centene (CNC) in the Niche Investments, which is a leading provider inside the ACA as well as the go-to contractor for Medicaid, Medicare and government-provided healthcare and insurance.

Mandates for green energy and restrictions on fossil fuels will negatively impact the petrol patch, which we’ve gotten out of with the exception of Viper Energy (VNOM) as well as natural gas pipes, including Kinder Morgan (KMI) and Enterprise Products Partners (EPD).

Natural gas is vital for current and expanding green energy, as the recent experience of California proves out. At the same time, environmental, social & governance (ESG) stocks in the green energy space will be in the catbird seat.

Another possible scenario is that the House stays in current control, the Senate stays in current control and the White House changes. This would mitigate legislative change risk. And the Senate would slow down lots of White House initiatives and appointments. For many in the markets, this scenario has a lot of appeal, as it would provide for a locked government.

But agency interpretation and enforcement of regulations and initiatives would be a challenge for many industries. Fossil fuels will suffer, while ESG would benefit.

Financials that are regulated would be in the gunsights. But we got out of banks a long time ago. And I have expanded the alt-financials that are outside of the purview of the Treasury and Federal Reserve. Sixth Street Specialty Lending (TSLX) and Main Street Financial (MAIN) would benefit.

If the House and Senate stay the same and the White House stays, then we have status quo. Recovery in the economy, tax code and projected earnings cases stay intact. But if the House stays, the Senate flips and the White House stays, look for no legislation and a constant barrage of attacks lobbed at the White House.

One of the big risks in the near term is that election results will take time given so much remote voting. Contested results, with both parties already heavily lawyered up, and street protests are real possibilities. This will not be well received in the stock market.

To get through this, make sure that you own US bonds, which remain the best risk/reward weighted opportunity right now. For my recent take, read my Digest on the advantages of the bond market.

The bottom line is that the US is a resilient nation and economy. Changes come, and we deal with them. Right now, the model portfolios are pretty well placed for the various scenarios coming out of Nov. 3.

Beyond bonds, there is another antidote already inside the model portfolios of Profitable Investing. The gold royalty company Franco-Nevada (FNV) is doing well, and that should continue beyond election day.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life