This blog is part of Bernstein’s series on the impact of the 2020 election on investors. Along with this, check out our other two blogs on how elections tend to matter for markets and the expected economic impacts of the election as well as our white paper on the wealth planning steps you should be taking in the next three months.
The implications of the 2020 election are likely to be felt based on their impact on different asset classes and, even more acutely, on different industries. As discussed previously, each potential configuration of Washington after the election will have ramifications for fiscal and monetary policy, but it’s only after you follow those consequences through to their impacts on the fundamentals of stocks, bonds, industries, and companies, that you can begin thinking about the market impact.
Which Outcomes Are Best and Worst for Stock and Bond Fundamentals?
At a high level, we’d expect different election outcomes to create a range of scenarios for the fundamentals of US stocks and bonds (Display).
For instance, if the Status Quo prevails, it would likely deliver the biggest tailwind for companies’ earnings by taking corporate tax hikes off the table. Republicans may also look more favorably on stimulus, along with an infrastructure plan based on GOP priorities, if they hold unified control. And while these factors might benefit stocks, from a risk perspective, equities would still likely have to contend with the high volatility of elevated trade tensions.
On the other hand, a Biden White House—opposed by a GOP Senate—could pose the stiffest headwinds to economic recovery and corporate earnings due to partisan gridlock. We can envision a scenario where Republicans sharply pivot toward fiscal austerity, regardless of the level of stimulus needed to reinvigorate the economy. Biden’s infrastructure plan would certainly face challenges in this case, although attempts to raise corporate taxes may be tougher to pass, creating opposing impacts on companies’ bottom lines.
Sizing Up Bonds
For US fixed income, the questions mainly center around interest rates, inflation, corporate creditworthiness, and municipal bond fundamentals. In general, most election outcomes would keep rates low, with slight variations depending on the balance of power. But inflation may be a different story. Here, a Status Quo or Blue Wave outcome could exert the greatest upward inflationary pressure due to stimulus and infrastructure spending. The Status Quo scenario also introduces the risk of a new Fed chair who is less inclined to maintain the central bank’s independence, which could stoke inflation expectations.
Within corporate credit, we’d expect divergent regulatory and tax regimes to produce varying headwinds and tailwinds. For municipal bonds, three forces come into play: higher individual tax rates would enhance their tax advantage over Treasuries; increased issuance for infrastructure development might lead to an imbalance between supply and demand; and the degree to which each party seeks to shore up state and local finances could also tip the scales.
The Tipping Point for Industries and Companies
The more granular we get, the greater the potential impact of the election (Display). When we look at specific industries or individual companies, we see the largest potential effects.
Consider an infrastructure plan. If it takes place in a Blue Wave, we’d expect construction and engineering companies to benefit, along with firms delivering renewable energy solutions. But if the Status Quo result occurs, the benefits to renewables are much more muted.
Even within industries, results could vary. For instance, a Biden Administration might pursue high-speed rail, making winners out of the companies laying tracks, building railcars, and operating trains. But that rail could threaten the dominance of airlines flying along the same routes. At the same time, companies may shift strategies to adapt. Automakers and major oil and gas players are already investing in electric vehicle charging networks—depending on who wins the election, they may accelerate or slow those actions.
Healthcare—The Heart of Policy Differences
The healthcare sector’s fate also hinges on the election results. Companies whose revenue mix is tied to Medicare or Medicaid—as well as those more closely tied to employer-based insurance—are both bracing for impact. While the Affordable Care Act has boosted insurance industry profits in the past decade, Biden’s embrace of a public option could pose a risk to both insurance carriers and health care providers.
Depending on the service, Medicare pays between half and three-quarters of the rates private insurance companies pay; unless reimbursement rates rise from current levels, a shift of the insured population into that program could take a bite out of providers’ revenues. Plus, if successful, it could eventually become a competitive threat to existing insurers. Given this potential, we would expect a protracted fight on that front, and even opposition within the Democratic party.
Then there’s the pharmaceutical/biotech industry. President Trump and Vice President Biden have each offered plans to tackle high drug prices. Both would impact industry revenues, though the magnitude would differ. Bernstein’s Global Biotechnology Research team suggested last fall that Trump’s plan to index drug prices in government-sponsored programs to international standards would have a small but uneven revenue impact across companies. Biden’s plan, on the other hand, appears more sweeping—it would extend to pricing in private plans, limit drug launch prices, tie price increases to broader inflation, and allow people to buy prescription drugs from abroad. It would likely affect more drug companies and impact their revenues to a larger degree.
What Will They Do About the Tech Giants?
Much has been made of both parties’ appetite to regulate or break up the Tech Giants. While that’s widely viewed as a negative for the sector, the picture is more complex. First, regulation could backfire, as it often ends up reinforcing the benefits of scale in an industry. So efforts on that front could unintentionally allow the giants to become even more dominant. Second, breaking up the Tech Giants might not be as detrimental as you’d initially think. While certain companies would lose synergies, some might escape relatively unscathed. And others might actually benefit from improved managerial incentives and changes in the way the market values individual business segments.
How Should I Position My Portfolio?
Paul Samuelson, the first American to win the Nobel Prize in Economics, once said “investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”
As dramatic and exhausting as elections can be, they rarely yield opportunities for tactical allocation adjustments. The secret to long-term investing success is to establish a sound plan and stick to it. However, while the election may not serve as an impetus for large scale changes, we are still repositioning portfolios on an ongoing basis at the security level, where the outcome of the election is likely to have the most uneven effects. Ultimately, your investment strategy shares equal billing with planning and tax management. And, while the election may not spark opportunities to reallocate, it may prompt you to revisit your priorities and your long-term plan, while optimizing your tax efficiency. With a concerted effort, your portfolio should be able to withstand whatever the election brings and hopefully take advantage of an abundance of smaller opportunities that occur along the way.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.