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
