How investors should prepare for a Trump victory
Having already looked at the stocks and industry groups that will be most affected if Hillary Clinton wins the U.S. presidential election in November, we now turn our sights to what a win by GOP contender Donald Trump would mean.
Investors would do well to pay attention as the race between Trump and Clinton enters its final stage. We’re mere weeks away from the first debate, and the Republican candidate is finally ramping up his TV ad spending.
With just two months to go until ballots are cast, Wall Street will be closely monitoring the polls and the debate performances for clues about the path of policy come 2017. With both candidates running on wildly divergent platforms, the result will be a “binary” post-election outcome.
For investors, now is the time to start considering those outcomes.
In a note to clients, Citigroup (C) analysts summarized a Trump presidency as a positive for consumer discretionary stocks, financials, big tech, energy and materials, but as a negative for health care. Compared to Clinton, a Trump victory would seem to benefit a larger group of stocks and be harmful to fewer.
Trump has railed against what he views as excessive corporate regulation and taxation. He has also talked up the idea of a repatriation holiday, cutting taxes so multinational corporations bring capital held offshore back into the U.S.
He advocates an “all-of-the-above” energy plan (good for energy stocks), wants to boost low-skill wages by reducing immigration and increasing deportation enforcement (good for consumer companies) and wants a massive infusion of infrastructure and defense spending (good for industrials and materials shares).
A Trump win could have downsides, too. Citigroup analysts note that if he’s victorious, it could risk slower growth or even a recession if international trade becomes severely restricted. Multinationals could see profits pinched by higher labor costs and higher tariffs. And tech titans like Facebook (FB) could be hurt by any reduction in H-1B visas for skilled workers.
Financial giants like Bank of America (BAC) and Goldman Sachs could also be hit by Trump’s indicated support for reimplementing the Depression-era Glass-Steagall Act (repealed by Bill Clinton in 1999) that separated riskier investment banking activity from commercial banking. Hillary Clinton said back in November that she opposed this idea.
Another possible concern is Trump’s desire to see a less independent Federal Reserve and the fact that he’s no fan of current Fed Chair Janet Yellen -- which could undermine financial sector earnings via increased market volatility.
Offsetting this is Trump’s desire to dismantle the Dodd-Frank Wall Street reform law, which he believes is hampering banks’ ability to channel funding to growing companies.
He would be a clear positive for natural resources companies like ExxonMobil (XOM), however. Trump has advocated American energy independence, which is political lingo for more aggressive drilling for oil and gas in American lands and waters. Clinton, who believes in global warming with a stated preference for renewable energy, has said she’ll work to cut U.S. oil consumption by a third.
Gold miner Newmont Mining (NEM) would benefit from a Trump victory, according to analysts at Citigroup, because he represents “significant and perhaps unprecedented” policy uncertainty -- and uncertainty is generally good for gold. By comparison, Clinton is the “business-as-usual candidate,” in their view. They think a Trump win could push the yellow metal toward the $1,400-an-ounce level in 2017 -- which would be great news for Newmont and the entire precious metals sector.
Health insurance companies like UnitedHealth Group (UNH) would be at risk under a Trump presidency and would likely prefer Clinton in the White House.
Why? Because she plans on extending and increasing the reach of Obamacare, which has pushed millions of Americans to get coverage. The problem is that adverse selection has kept many young, healthy people from signing up, preferring instead to pay the tax penalty, thereby hurting profit margins in the industry. Hillary would likely further increase penalties for those who don’t participate, forcing more health premium payers into the system and boosting profitability.
And Trump would likely be a boon to defense contractors like General Dynamics (GD). He has loudly proclaimed that America’s military needs to be rebuilt and strengthened (using the examples of fighter planes older than their pilots) to secure the peace.
Clinton also seems to support a slight increase in military spending (by ending the defense budget sequester), but she’s focusing on the need to reform the acquisition process by “stretching every dollar.” A Trump victory would be preferable for investors in defense stocks.
As for the market as a whole, Citigroup believes the uncertainty and surprise associated with a Trump victory could result in a stock sell-off of around 5 percent followed by a pause as equity risk premiums -- the “extra” returns demanded by investors over safe bonds -- rise further. They think emerging and foreign market stocks would likely be hit the worst.
