The Circus Is in Town

by Brad Houle, CFA Executive Vice President

Our clients regularly ask about the financial impact of elections, especially as Election Day nears. We do know that, on average, the market is up 11 percent in election years, which is akin to the long-term average return. History has shown that markets (i.e., investors) dislike uncertainty. While the market normally adjusts and discounts the expected impact, this election cycle has been unique. Strategas Research Partners, one of our research partners, recently released an apolitical analysis of election-related economic issues. Below is an adapted summary of their analysis, focusing on sectors we believe will have the biggest economic impact, such as healthcare and fossil fuels.

Democrats are in favor of price controls on pharmaceuticals and would likely keep the Affordable Care Act in place. Either party victories would benefit infrastructure spending, but with the Democratic Party there has been talk of a New Deal-like program to stimulate the economy. A Democratic win would be a financial negative for the fossil fuel industry but this change would most likely benefit alternative energy producers as energy policy would shift away from fossil fuels. High-end consumer discretionary companies (e.g., retailers) would be negatively impacted as the Democratic Party has pledged to raise taxes on the wealthy which would be a headwind. In addition, a broader increase in the minimum wage would add to the labor costs of retailers. Lastly, a Democratic victory would most certainly lead to greater regulation for the financial sector.

In a Republican sweep, an attempt to dismantle all or parts of the Affordable Care Act would be expected. However, Donald Trump has endorsed some changes to pharmaceutical pricing, creating a wildcard for the industry.  A Republican victory would result in an infrastructure spending benefit but not to the same degree as the possible “new” New Deal of the Democratic Party. A Republican president would help benefit all aspects of the fossil fuel industry as Republicans would look to relax carbon emissions rules and make energy the main economic policy. Donald Trump has pledged to cut taxes for 80 million Americans, creating a positive impact on consumer spending. Republicans would likely limit further regulation and subject the Consumer Financial Protection Bureau to an annual appropriation which would limit its power.

Unconventional candidates and an “anything could happen” atmosphere have increased market uncertainty. However, despite this uncertainty, the markets will continue to operate as usual as we move towards the end of the 2016 election year.  History has shown that financial markets generally see past election results and no permanent damage is generally done.

Our Takeaway for the Week

  • There are potential capital market benefits to either a Republican or Democratic being elected as president in November
  • Investors don't like uncertainty, but historically election years have been positive for stocks