Positioning your portfolio for a post-election surge

Hordes of investors are still spooked by fears that a stock market meltdown will occur before or after the coming overheated presidential election. Justifiably so, if only because of the unprecedented firestorms of accusations and sordid language on the campaign trail as Republican Donald Trump and Democrat Hillary Clinton fight to the finish. 

In recent weeks, investors’ concern was reflected in the market’s listless performance of late, partly mirrored in the  Bull-Bear Ratio, which is now neither bullish nor bearish. “The stock market seems to have a case of the summer doldrums” in autumn, noted Ed Yardeni, president of Yardeni Research. The the S&P 500 index was down 2 percent in September and is so far down nearly 2 percent in October.

But fear not, because it’s more likely that rather than a market meltdown, share prices will -- in Wall Street parlance --  “melt-up” instead in a surge of rising valuations. That’s based in large measure on analysis from election experts and polls showing Clinton is way ahead and appears likely be the next occupant of the White House.

The Wall Street Journal/NBC News poll on Sunday showed the former Secretary of State ahead by 11 percentage points in a race that includes third-party candidates. Clinton is also leading in polls in more than enough states to put her over the top in the Electoral College, if those polls hold true. John McCormick of Bloomberg argues that Trump needs to stage a “historical comeback to win the White House in 20 days as key slices of the electorate drift away from his candidacy.”

“I think a further leg higher in the market would be possible if Hillary Clinton wins,” said Sam Stovall, investment strategist at S&P Global Market Intelligence. Yet the Congress may stay Republican, he added. Nonetheless, a “dominance of Democrats in Washington would worry investors that the focus might be on additional regulations on the financial service and health care sectors.”  

Yardeni acknowledged, quite reluctantly, that investors seem to prefer Clinton, as he criticized her economic program that includes higher taxes and more regulations. In his recent Morning Briefing Report, Yardeni noted that a lot of speculation is swirling that either a meltdown or a melt-up in the stock market will occur after the Nov. 8 elections. 

“We are more inclined toward the latter (melt-up) scenario,” he said. Although continued listlessness “makes more sense,” he added, “we are still aiming for 2,300-2,400 for the S&P 500 next year.” But there could be a prolonged period of “wait-and-see after the elections,” said Yardeni. That’s partly because the U.S. economy, he argues, is likely to continue muddling along for the foreseeable future.

However, the bulls contend that a Clinton presidency could well alter the course of the economy in a more positive way, with her economic plan that promises to include increased spending on infrastructure projects, raising the minimum wage and cutting taxes on middle-class families.

Yardeni believes the “earnings recession is over” after the S&P 500 operating earnings per share declined on a year-to-year basis for the past four years through the second quarter of 2016. So he expects that a positive earnings comparison is likely for the fourth quarter. “The S&P 500 forward revenues and earnings are now both in record territory,” he added.

On the market’s upswing in valuations, Yardeni admits that they could certainly go higher in a market melt-up. “Our bullish outlook is based on our view that single-digit earnings growth will do most of the heavy lifting,” said Yardeni.

In the meantime, Yardeni Research’s Weekly Leading Index (WLI), which he noted is a good coincident indicator that can confirm or raise doubts about stock market swings, “has climbed to another new record high, advancing 2.8 percent in four weeks ended Oct. 8. The WLI is the average for Yardeni’s Boom and Bust Barometer (BBB) and Bloomberg’s Weekly Consumer Comfort Index (WCCI).

So which industries are apt to immediately benefit from a sudden market melt-up? The most essential factor to consider is which industries have the money or robust balance sheets to benefit from a positive market upswing.

“Tracking which industries are attracting money and which ones aren’t can sometimes foreshadow what the future holds,” said Yardeni. Industries selling lots of debt or equity may face overcapacity and gluts a year or two out, he noted. And conversely, “industries that haven’t had heavy capital inflows are often lean and ready to perform well when good times -- and investors -- return,” he argued.

Based on the money factor, three sectors look well situated to benefit from a melt-up: The nation’s major banks, specifically JP MorganChase (JPM), Citigroup (C) and Bank of America (BAC); the investment brokers/financial services) group, Goldman Sachs (GS), and Morgan Stanley (MS); and the media/entertainment sector, led by Amazon (AMZN) and Netflix (NFLX). 

Yardeni said the nation’s banks have attracted just enough capital to shore up their balance sheets since the financial crisis. But he also acknowledged that despite the weak economic growth under President Obama’s administration, the S&P 500 is up 214 percent since its Mar. 9, 2009, low and only 2.9 percent below its high on Aug. 15.

The big banks, in particular, may finally be putting the nightmare that was 2008-2009 behind them, said Yardeni. Loan losses and legal fees are down, lending in most areas is up and costs are being cut. Indeed, bank loans at U.S. commercial banks rose to a record high of $9.1 trillion, up 8 percent year-over-year in the first week of October, he noted.

JP Morgan, Citigroup and BofA each enjoyed unexpected profitability in their trading and investment operations during the third quarter, perhaps helped by this summer’s volatility and market share gains at the expense of Deutsche Bank (DB) and other European players, Yardeni pointed out.

Goldman Sachs and Morgan Stanley were among the biggest beneficiaries of the jump in fixed-income trading. Goldman’s fixed-income, currency and commodity trading rose 34 percent, to $1.96 billion. And Morgan Stanley’s revenues from trading bonds, currencies and commodities surged 61 percent, to $1.48 billion. The gains at MS came even after the company laid off 25 percent of its fixed-income traders.

Among media companies, Netflix plans to spend $6 billion on programming next year, up 20 percent year-over-year, and will soon sell bonds to raise cash. It plans to release 1,000 hours of original video next year, up from 600 hours this year, and will take on dozens of new employees to help find, produce and market TV shows and movies, according to Bloomberg.

Amazon has joined Netflix in such a heavy-spending spree. Both companies combined will spend more on TV programming than HBO, Turner and CBS individually, according to HIS Technology as cited in a recent article in TechRadar.

So if things go as planned, these banking, investing and media-entertainment giants could all be part of a big melt-up of their own making.