As we approach the Presidential election in November, markets are in a seasonally strong period of the four-year Presidential cycle. Government stimulus often coincides with the timing of elections as incumbent parties push for growth ahead of reelection. On average, the market has responded favorably to stimulus measures and this cycle has been no different. Year-to-date, monetary and fiscal policy have both been very positive and should remain so through the elections and into 2017.On a longer-term basis, we anticipate a key shift in the source of stimulus as fiscal policy/government spending plays an increasingly important role and monetary stimulus slowly fades. For now, both are very positive.
We caution clients regularly not to make major shifts in investment allocations as a result of, or in anticipation of election outcomes. Election results usually have the greatest impact on specific industries as policies of elected officials are gradually implemented. Actively managed mutual funds are best positioned to exploit election-driven change at the industry level. Below we outline some of the areas that may be influenced by a Democrat or Republican victory in November:
- Defense: Defense spending appears poised to increase regardless of the elections outcome. The defense budget would likely increase more under Republican leadership.
- Infrastructure: Both candidates appear interested in increasing infrastructure spending. Democrats believe the U.S. economy is in secular stagnation and view infrastructure spending as a key initiative to boost growth and provide jobs.
- Municipal Bonds & Build America Bonds: Democrats will likely push for higher taxes to pay for increased spending. Municipal bonds and BABs would likely benefit from the infrastructure initiative. On the other hand, Republicans will seek to reduce taxes, both at the corporate and personal level.
- Health Care: This sector is likely to be impacted more by the elections outcome than most others. Democrats are likely to push for continued Affordable Care Act subsidies for hospitals and HMOs, while seeking increased generic competition on drug prices (a negative for pharmaceutical and biotech companies). A Republican win would likely benefit drug makers and medical device manufacturers.
- Minimum Wage: Democrats are likely to push for an increase in the minimum wage to $15. This expectation has been a headwind to restaurants and other industries exposed to such a wage increase. Treasury inflation protected securities may benefit should wage pressure become more pronounced as the economic cycle matures and labor markets tighten.
- Energy: Despite political rhetoric, we expect the energy sector to be driven more by supply/demand fundamentals than government policy under either party.
This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.