ARE POLITICALLY SENSITIVE GROUPS AND POLLS ALIGNED?

The broad market’s performance may be telling us something about the November election, but what about some of the most politically sensitive industries? If the market was pricing in a Clinton victory, certain industries where her platform may not be as supportive would be expected to lag the market (and vice versa). We looked at the relative performance of several politically sensitive industry groups to see if they were aligned with a market-based version of a presidential election poll to determine if their performance might be telling us something about the potential outcome in November.

Financials

Clinton is likely to be much tougher on bank regulation that Trump. She has supported tough financial regulation under the Dodd-Frank law, while Trump has indicated his interest in dismantling the law. Clinton has indicated that she would be willing to break up financial institutions deemed “too big to fail.” She would propose a risk fee for big banks and financial institutions based on their size and their risk of contributing to another financial crisis. Both Clinton and Trump have included reinstating Glass-Steagall as part of their platforms, which prohibits commercial banks from engaging in investment banking.

What is the market saying? As shown in Figure 3, from mid-May (when the two nominees became clear) through the end of July, the odds of a Clinton victory tracked the (inverse) relative performance of bank and capital markets stocks. We believe prospects of a continued tough regulatory environment, including the anti-Wall Street rhetoric (even if Glass-Steagall faces very long odds of being reinstated), played a role in the relative weakness of these groups during that time.

But during the last couple of weeks, as Clinton’s odds of winning increased in the polls, financial stocks did well. Gains in these stocks in August likely reflected the move in interest rates, from 1.46% on the 10-year Treasury at the end of July to just shy of 1.60% late last week, which may have overwhelmed politics. Alignment between market and polls: Good.

Healthcare

Clinton is a strong defender of the Affordable Care Act (ACA) and arguably one of the early architects of some of the law’s basic concepts. Trump, on the other hand, has stated his interest in repealing it, a key pillar of the Republican platform. Both candidates have expressed support for the government (Medicare) to negotiate drug prices directly to help bring down prescription drug costs, though Clinton has more credibility on this issue than Trump.

What is the market saying? The ACA means more insured patients, so the healthcare facilities and managed care groups should have done well recently as Clinton’s odds of winning have increased. But as shown in Figure 4, they really haven’t, especially facilities (remember the relative performance lines are inverted). Some of this inconsistency, we believe, reflects the profitability challenges for certain healthcare institutions under the ACA. Pharmaceutical stock relative performance has only begun following its expected path (inverse correlation to Clinton’s odds) over the past month. The weakness of this link, besides various company specific issues, may be due to the market’s expectation that, even in a Democratic administration, it is unlikely that major drug reforms will get through Congress. Alignment between market and polls: Mixed.

Energy

The candidates have very different approaches to energy policy. Clinton wants to reduce American oil consumption by a third through cleaner fuels and more efficient cars, boilers, ships, and trucks. Trump, on the other hand, has talked about reducing regulations for drilling, approving the Keystone XL pipeline, and put one of the pioneers of the oil and gas shale revolution on his economic advisory council.

What is the market saying? 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. Still, oil and gas exploration and production stocks did underperform from mid-May through the end of July as Clinton’s odds improved [Figure 5]. The outperformance of energy stocks in August, despite Clinton’s improving odds, has been driven more by anticipation of an OPEC production agreement next month than politics. Alignment between market and polls: Fairly close until recently.

What About Infrastructure?

Both candidates have supported infrastructure spending, such as fixing roads and bridges, to help stimulate the economy and increase employment. In what has been more of a Democratic position in recent years, Trump has proposed to spend double Clinton’s $275 billion over the next five years. All things considered, the candidates have not differentiated themselves much on this issue (similar to international trade, which both would like to restrict to varying degrees). Not surprisingly, construction materials stocks did quite well early this summer as Trump’s plans became clearer.

CONCLUSION

The broad market seems to be in alignment with the polls in suggesting a Clinton victory in November is likely, although anything can happen. The lack of market volatility in recent months may reflect the market’s preference for less uncertainty under Clinton’s leadership, while financials stocks, which would be expected to do better under Trump, have generally struggled as Clinton’s odds of victory have risen. The messages from other politically sensitive groups including healthcare and energy are more mixed. We will continue to watch for signals from the market as to what may happen in November, as we can all agree, regardless of one’s political leanings, that this election will have investment implications.

Burt White is chief investment officer for LPL Financial.

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