As we are already into the final 90 days prior to the presidential elections, the analysts have revealed the 4 critical industries that heavily depend on the outcome of the battle between Clinton and Trump. What should investors prepare for?
The LPL Research's analysts analyzed the market trends of this summer and finally unveiled which industries should prepare for the worst (or the best) upon the announcement of the elections results. Financials, energy, healthcare and infrastructure are the most "politically sensitive industries" that are caught in the Clinton vs. Trump crossfire. According to the researchers, financial industry is going to be the most vulnerable of all.
As the odds of Clinton's win are getting higher (more on that below), the financial industry is starting to get more and more anxious.
The future of the financial sector looks very different in the plans of the candidates. The analysts say that Clinton is likely to be much stricter with the bank regulations than Trump, as she is known to be supportive of tough regulation policies in the industry. She favors the Dodd-Frank law that was created as a response to the 2008 financial crisis while Trump has announced his plans to repel it. This could mean the world of a difference for financials.
"She's probably going to impose more regulation on financials than Mr. Trump would, and so you're starting to see some underperformance in financials as she becomes more of the clear-cut winner in November. I think having Mrs. Clinton as president would likely be a drag [for the financial sector," LPL Financial's John Canally told CNBC.
On top of that, Clinton mentioned that she would be considering breaking up major financial institutions that are "too big to fail", says the report. That is why in the light of the rising prospects of Clinton's win and tightening regulatory environment, the financial industry has been showing relative weakness between mid-May and end of July, when Clinton came about as a clear candidate.
The next industry on the list is healthcare. The sector has received a lot of buzz in the past weeks followed by the scandal around Mylan's EpiPen prices and Hillary Clinton's statement against it. According to the LPL's research, health care stocks should not be expected to thrive under Clinton's administration as she has indicated her plans to strengthen the control in the industry. Since May, when the final candidate names were announced, health care stocks have shown downward trends indicating the "inverse correlation to Clinton's odds". Clinton's statement on Mylan last week has dragged the iShares Nasdaq Biotechnology ETF (NASDAQ: iShares Nasdaq Biotechnology Index Fund [IBB]) biotech stock down.
And again, healthcare stocks can expect volatility as the two candidates are far from agreeing on the future of Obama's Affordable Care Act. Clinton is known to be a strong supporter of the act whereas Trump has stated his interest in dismantling it. Looks like healthcare industry is also not expecting any peaceful times to come.
Yet when it comes to the energy industry, the analysts say that its future is mostly dependent on the parameters that are determined on the global level rather than on a national, such as the oil prices.
"Drawing comparisons between energy and policy is tricky because of the many macroeconomic factors that drive oil and the tight relationship between oil prices and oil stocks," says the report.
However, the outcome of the elections will still bring significant changes in the industry. Clinton's plans are to go "green" and reduce oil consumption in the U.S. by at least a third through using sustainable transport and clean fuels. In general, Clinton is a proponent of renewable energy as opposed to Trump who is planning to support and boost domestic oil and gas industry. Trump has shared his plans to further weaken drilling regulations in the country and support the construction of the Keystone XL pipeline.
In this sense, the results of November elections are going to be critical for the future of the energy industry in America and touch a lot of companies. LPL's analysts see the correlation between the oil and gas industry's recent (slight) underperformance and improvement in Clinton's odds since mid-May. Yet again, the volatility of the oil and gas industry is more likely to be determined by the oil prices.
The only industry that is predicted to actually gain from the elections, regardless of who wins, is infrastructure. The two candidates have promised to support the development of the infrastructure industry and both announced the plans of investing substantial funds in it. In the next 5 years, Clinton promised to invest over $275 billion in infrastructure development whereas Trump claimed to double the budget proposed by Clinton.
This goes in line with the list of 150 stocks that the Bank of America Merrill Lynch predicts to rise in a response to the changes in the politics. 61% of the companies in that list come from the infrastructure sector.
Stock market has already selected the winner
As you might have noticed, LPL's research talks about the market predictions in a way that implies the higher odds of Hillary Clinton's win. The say that there are certain indicators in the stock market's behavior that point to Clinton having higher chances to be the next American president.
The researchers say that there is a "historical" trend that is able to predict the winner of the upcoming presidential elections with a 82% certainty, based on the volatility of the stock market. The report says that in the past 90 years, 18 out of 22 elections in the U.S. were accurately predicted by the changes in the stock market happening in the last 3 months of the pre-elections period. That is why, based on the fact that we have witnessed a record spike in the largest stock indexes only 2 weeks ago, the market is clearly trying to say something.
“The market appears to have decided not only that Clinton will win, but that it won’t be close,” said David Woo of the Bank of America Merrill Lynch.
Woo refers to a similar stock market prediction metrics that is based on the performance of the S&P 500 Index (INDEX: US500). He said that in the years when a presidential candidate won by a margin of over 80%, the S&P 500 demonstrated average returns of 8.4% in the 3 months prior to the elections. This time, the index has grown by more than 4% already since July.
“Whenever the S&P 500 fell in price during these three months, however, it signaled the replacement of the incumbent 86% of the time,” Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence told Marketwatch.
The bottomline of LPL's research is that the upcoming elections will leave a significant mark on the most politically sensitive sectors, regardless of who will be the winner. That is why, investors should be prepared for the changes in the stock market in the coming months and keep in mind the industries that could suffer or benefit most from both possible outcomes.
For now, infrastructure stocks look like the safest choice for investors who want to "avoid the trouble", as this industry is likely to be supported by the next elected president. In our previous article we discussed the most promising stocks to invest in the industry, as outlined by the BofAML.
Likewise, Trump's presidency would hit stocks that are associated with the "green" direction but boost those of the oil and gas industry. Based on Trump's plans, foreign stocks will also be in danger because of the candidate's controversial plans regarding the free trade.
In turn, Clinton's win is expected to negatively affect the U.S. stock market as a whole, due to the vulnerability of the financial sector. Yet the companies supporting green energy will gain favor.