How to Trade the 2020 Election, Pt. 2
While voters will get the final say on who will be the next president of the United States next November, the slow and grinding process of fighting for the Democratic Party nomination will no doubt keep many political gadflies on tenterhooks.
As I discussed in the first part of this series, Morgan Stanley (NYSE:MS) published a simple guide for investors on how to trade the 2020 election. In that previous entry, I discussed the advice regarding the two likeliest electoral outcomes:
The Republican candidate (essentially guaranteed to be the incumbent, Donald Trump, barring some disaster between now and Election Day) wins the presidency, but Congress remains divided - as it is at present.
The Democratic candidate (who this will be is likely to remain something of a mystery for some time yet) wins the White House, while Congress stays divided as with the previous scenario.
Obviously, these are not the only conceivable outcomes for this election, which promises to be one of the most savagely fought in history. Indeed, Morgan Stanley's guide offers advice on how investors should react under two other less probable - but far from impossible - scenarios.
Democrat president, Democrat Congress
This scenario is considerably less likely due to the fact that Congress will be hard for the Democrats to flip in 2020. The party controls the House of Representatives, but it will have considerable difficulty flipping the Senate. According to poll aggregator 270towin.com, there are currently just four Senate seats considered toss-ups this cycle, with one additional Democrat seat and two further Republican seats currently on the edge of falling into that category. The Democrats need to gain four seats to take the majority. That is a tall order, but not an unthinkable one.
In this scenario, Morgan Stanley recommends buying alternative energy stocks, as a Democratic president, backed by a friendly Congress, would almost certainly push for an expansion of various incentives, subsidies and tax credits to support companies focused on renewable energy developments, including solar, wind and geothermal power. A renewal of federal largesse would result in a strong tailwind behind a number of companies, while shoring up the wobbly finances of well-known operators like Sunrun Inc. (NASDAQ:RUN), which has struggled in an increasingly commoditized residential solar market.
Many of the stocks that would likely do well were Trump returned to office will face serious pressure under a Democratic administration backed by a congressional majority. Big banks, big energy companies, big tech and big pharma can each expect to struggle after such a result, since most of the candidates for the Democratric nomination have pledged to curtail their powers, with some even suggesting the biggest players be broken up entirely. Even under the most moderate of Democrats, these sectors should expect to struggle; if triumphant in the Senate, congressional activism would certainly be on the political menu.
Republican president, Republican Congress
Arguably the least likely of the four scenarios examined by Morgan Stanley, it would take some serious upheaval for the Republicans to take back the House majority. In practice, the party seems committed principally to maintaining its small Senate majority, with few analysts seeing much hope of a serious congressional victory. However, strange and improbable things have happened before - Trump's own shocking victory in 2016 offers ample proof of that fact.
In the event of this scenario, Morgan Stanley recommends buying U.S. energy and big bank stocks, just as it did in the case of a Republican president with a divided Congress. With a fully supportive legislative branch behind him, Trump would find it even easier to continue his ongoing campaign of deregulation in these sectors.
On the flipside, Morgan Stanley recommends selling U.S. Treasuries and emerging market assets. Both would come under pressure were the dollar to continue to strengthen against most other currencies.
Comparing scenarios
Neither of the scenarios discussed are as likely as those covered in my previous entry, but they remain potential outcomes that deserve thorough consideration. These are the more extreme outcomes, magnifying the effects of victory for one side or the other. In either case, there would be considerably greater volatility in those assets under the political microscope.
Ultimately, while various asset classes and sectors are likely to react meaningfully to the election results, Morgan Stanley's analysts remain unconvinced that the potential market risks would persist long after the election:
"While it would be reasonable to deduce from our survey that moves toward a Democratic victory could initially weigh on risk markets, we wouldn't have confidence in the durability of such a reaction. The 2016 election serves as a cautionary tale here."
Whoever wins in 2020, investors will need to be on their toes.
Disclosure: No positions.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
