What if Clinton Wins?

Is it a third Obama term or something entirely different?

Hillary Clinton has been the favorite to win the presidency for most of this election cycle. Recent polling reinforces that perspective. Indeed, if the most recent polls are to be believed, Secretary Clinton looks to win in a landslide and the Democrats will establish a majority in the Senate, while increasing their number of seats in the House. While much of her campaign has sought to capitalize on the general popularity of President Obama, there are some meaningful differences in both circumstances and policy that will mean certain departures from the status quo. 

THE TECHNOLOGY SECTOR WILL LIKELY CONTINUE TO BENEFIT FROM THE CURRENT ENVIRONMENT

One area unlikely to change is the technology sector. While Secretary Clinton has made some statements in the past about her concerns regarding the “gig economy” and the labor practices of certain technology companies like Uber, she’s unlikely, I suspect to upset a relationship that’s been highly beneficial to the Democrats and which has been one of the strongest points in the US economy. This generally means a more favorable environment towards mergers and acquisitions, and a continued soft approach towards labor issues. The net result is continued profitability and favorable trends in terms of valuation. In particular, a Clinton presidency is likely to be good for social media companies. (Although many of the industry’s internal forward challenges still remain…)

A MORE HOSTILE ENVIRONMENT FOR THE TRADITIONAL ENERGY SECTOR IS ALMOST GUARANTEED

The same cannot be said of the energy sector. While unlikely to be able to reform the tax code in a meaningful way without control of the House, and somewhat limited by Bush era laws that limit the federal government’s ability to regulate energy production, there are several ways that the executive branch can create a more hostile, less-profitable environment for traditional energy firms. And it is likely to do so; While similar in rhetoric to the Obama administration on energy and climate change, I think the Clinton administration would be more aggressive, and overall, energy investments look less attractive regardless of the specifics. Low energy prices and increased international concerns about climate change create a “double-whammy”; and should the Democrats control the Senate and the presidency, they can ratify the Paris Climate Treaty and pursue an agenda regarding energy with fairly little political consequence. All of this points towards a less-attractive environment for virtually all forms of oil and coal, and most likely natural gas as well. 

FINANCIAL SERVICES FIRMS ARE LIKELY TO SUFFER AS WELL

Americans of all political orientations and socioeconomic backgrounds seem to harbor an intense hostility towards the financial services sector in the wake of the financial crisis of 2008-2009. Under the Obama administration, the financial sector was treated with some degree of caution in the first two years owing to the dramatic changes brought on by the Dodd-Frank Act and a sense of it’s fragility. In subsequent years, the administration was limited by GOP control of both houses of congress. Despite receiving extensive support from the financial services sector, I don’t expect the history of close financial ties with the Clintons to make much of a difference for publicly-traded financial firms. The presidency - particularly one that shares the same party as the majority in the Senate, with it’s power to approve appointments to various agencies, wields tremendous influence over financial services’ profitability and growth prospects. I would expect the effect to be negative on both, with the exception of investment banks with little or no exposure to consumer finance or products.

MUNICIPAL BONDS ARE LIKELY TO FARE BETTER UNDER A CLINTON ADMINISTRATION

For the same reasons that GOP dominance of the federal government would be bad for the municipal bond market (potentially), Democratic leadership is likely to be a net positive. (For those who didn’t read “What if Trump Wins?”, let me summarize by saying that the health of the municipal bond market is generally more important to Democrats.) Clinton has made a significant chunk of her real estate agenda centers around ‘Mortgage Revenue Bonds’ issued by municipalities to subsidize low to medium income borrowing. To summarize; I think municipal bonds (particularly high yielding ones) are more attractive should Secretary Clinton win.

DEFENSE IS A WILD CARD

Whether we will see an uptick in defense spending is a difficult call. While my general feeling was that a Trump administration was unlikely to be good for publicly-traded defense stocks, Secretary Clinton seems to be willing and interested in projecting American power overseas than her predecessor. It’s no small secret that underinvestment in military hardware, and advances in technology have led to a loss of American leverage in international affairs and this is one of the few areas where there is bipartisan support. While defense contractors have generally faired well over he last few years, valuations remain reasonable. Demand and current trends in naval and aerospace technology would likely benefit Lockheed (LMT), Raytheon (RTN) and General Dynamics (GD), in particular.

IN SUMMARY, ITS PROBABLY ADVISABLE TO REDUCE EXPOSURE TO ENERGY AND FINANCIALS ARE NOT ATTRACTIVE

While the outcome of the election is by no means certain, and I remain reluctant to say with confidence that Secretary Clinton will win, it seems advisable to review clients’ exposure to energy, in particular. It’s a notoriously volatile sector and unlikely to give us much room in the wake of a Democratic ‘landslide’ (defined in this case as a takeover of the Senate and a clear win by Clinton.) Accordingly, I am inclined to liquidate energy stocks and financials in the coming weeks ahead of the election.

As always, please don’t hesitate to call!

Best, Mike

What if Trump Wins?

It would be "yuge"

With the elections in less than a month, investors will face a significant turning point. Both presidential candidates have taken positions and expressed a desire to pursue agendas that will represent a departure from the current administration's.

While not the expected winner by most analysts, if Donald Trump becomes the next president, he will likely usher in several policy changes which will have significant impact on certain sectors of the financial markets. Given the continuing closeness in the polls (and the unreliability evidenced by the “Brexit” referendum) it seems appropriate to review this matter, discuss some potential outcomes and discuss investment strategy in the wake of a Trump victory.

Should Mr. Trump be elected, my assumption would be that the GOP would also retain control of both the House of Representatives and the Senate. It also seems likely that the Republicans will, regardless, expand their majority in the Senate in 2018 due to several state-specific factors. Given this potential scenario, this is likely to embolden the GOP leadership in congress, making it possible that the senate under a “Trump majority” would eliminate the filibuster, making legislative changes and executive appointments far easier. All of this is likely to give President Trump a great deal of flexibility and latitude.

TECH IS SPECIFICALLY VULNERABLE

Most obviously, technology companies would likely experience a significant transition. This has been presaged by the European Union’s regulatory changes in the last few years that have created increased legal and tax liabilities for these firms, but more significantly, the sector currently enjoys an intimate relationship with the Democrats. A change in the party controlling the presidency would leave it vulnerable and less profitable. Should Trump win, the ironic but intense hostility between Trump, his supporters on the “Alt Right” and technology companies over claims of censorship and bias will likely lead to policies that will place pressure on firms like Facebook (FB), Twitter (TWTR), Google (GOOG), Apple (AAPL) and Amazon (AMZN).

Beyond social media, the technology sector overall has been almost exclusively associated with the Democratic party, with more than 85% of donations going to the party and affiliated political action committees.  Since 2012, the relationship has become increasingly poisonous with the Republicans over social and immigration issues. Mr. Trump has expressed specific hostility to Apple's (APPL) offshore manufacturing practices.

The industry has been highly reliant on work visa programs, and offshore accounting and tax strategies which make them particularly vulnerable to tax and trade policy changes that can be initiated from the executive branch. Indeed, many policies could be tailored to specifically disadvantage the technology sector - or even specific firms.

Most notably, Amazon (AMZN) faces risks as Mr. Trump has made it extremely clear that he believes that the company has a "a huge antitrust problem,” and founder and CEO Jeff Bezos’ ownership of the Washington Post seems to largely drive this ‘concern.’ Under a Trump administration, it seems likely the Justice Department will take an immediate and aggressive interest in the firm.

TRADITIONAL ENERGY INVESTMENTS ARE LIKELY TO BE MORE ATTRACTIVE

In contrast, Trump has also made it clear that certain industries would receive much more favorable treatment by his administration. Oil, gas, coal and other traditional energy firms would face an extremely different environment. While unspecific, Mr. Trump has been clear that his energy policies will be a repudiation of the Obama administration’s openly hostile approach to carbon-intensive energy producers. Trump’s specific tax proposals would also make such energy investment significantly more attractive. While the impact of such a favorable approach is less substantial in a world of sub-$50 oil, it’s reasonable to assume that the valuations of various firms in the sector will increase with such changes.

MUNICIPAL BONDS MAY BE LESS ATTRACTIVE

Finally, various municipalities are facing considerable budgetary problems attributable to long underperforming local economies, as well as pension and health care obligations to retired public employees related to demographics. These cities and states are overwhelmingly in Democratic majority regions (but not exclusively so). Depending upon the degree to which President Trump and Republicans in congress sought to inflict blows upon the Democrats (and their tolerance for residual casualties in economically distressed Republican strongholds like Alabama), relatively minor changes in accounting regulations could be devastating to these municipalities and have highly destabilizing effects on the municipal bond markets. The nature of this threat is much less clear, however, than that the threats potentially facing the technology sector.

HOWEVER, THE BEST APPROACH IS TO 'WAIT AND SEE'

At present, it appears that Clinton will win on the 8th. But, I remain less convinced than most of my colleagues - leading me to seriously speculate on the possibility of her losing.

Should polls start to make it obvious that Mr. Trump will likely win between now and the election (a remote possibility, I suspect), then I am inclined to significantly cut back on clients’ exposure to those companies in the technology sector that I've discussed here. However, if the polls continue to show a tight race with Secretary Clinton, then I am inclined to wait until after the election to make adjustments, in particular because I believe the majority of investors will continue to fail to appreciate the significance of a Trump victory in the subsequent market trading days - providing us with an opportunity to adjust accordingly.