2020 Election: Policy Plays
Matthew Bartolini takes an in-depth look at the candidates’ policies and offers implementation ideas to position portfolios based on the outcome of the presidential election.
By the end of September, the 2020 US presidential election had already witnessed many twists and turns. However, the news breaking on October 2 that President Trump and First Lady Melania Trump had tested positive for COVID-19 added a new layer of uncertainty to this cycle.
Like the long list of October election surprises — most recently, the Comey Letter in 2016 — this announcement will have a short-term impact on polls and markets. However, the five policy issues discussed in my earlier blog could shape the trajectory of market segments for years to come. Here we offer implementation ideas to position portfolios based on the outcome of the presidential election.
Taxes
Policies: Biden plans to increase taxes for corporations and high earners, while Trump has called for further tax breaks.
Probability: Passing new tax legislation depends on whether Republicans can maintain control of the Senate — a toss-up as of now. Currently, the probability of the House remaining under Democratic control is 85%.1 So, a split Congress leaves little room to get a tax deal done. However, if the Senate goes to the Democrats and Biden wins, his tax policy plans are likely to be implemented.
Plays: Biden’s policies suggest that investors focus on low tax-sensitive sectors, such as Real Estate. That sector’s earnings may be less affected if tax rates rise, given that its average effective tax rate in 2019 was just 4%.2 Tax-exempt bonds may be another Biden play, as those securities would likely become more attractive sources of returns, considering that the interest paid to investors is not subject to federal taxes.
If Trump wins a second term, high tax rate areas — such as Consumer Staples (29% effective rate) and Retail (24%) — may do well, as their earnings could be positively impacted by paying less in taxes. Additionally, lower individual tax rates could spur consumption and be a benefit to certain consumer-focused markets.
Source: Bloomberg Finance L.P. as of October 2, 2020. Characteristics are as of the date shown and may be subject to change.
Implementation Ideas:
Biden: Consider the Real Estate Select Sector SPDR Fund [XLRE], and for a tax-exempt exposure with a potential income boost, consider the SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF [HYMB].
Trump: Consider the Consumer Staples Select Sector SPDR Fund [XLP] and the SPDR S&P Retail ETF [XRT]. XRT has 65% of its exposure in mid- and small-cap stocks,2 with no security contributing more than 2.5% of the portfolio’s overall risk profile3 – mitigating the impact of one single stock upending this play.
Trade
Policies: More of a globalist, Biden is likely to repeal current tariffs, while Trump’s “America First” foreign policy agenda will likely feature more tariffs.
Probability: The White House’s sweeping trade powers make it easier for presidents to enact their policies.
Plays: If Biden wins, the negative price action we witnessed when tariffs were levied on Chinese equities may be reversed. As shown below, Chinese stocks fell significantly relative to the US in both March and June 2018 (the first and second round of 25% tariffs on steel imports and then 818 Chinese products). Similarly, given the number of tariffs placed on European products and services, that region could see a boost in sentiment if Biden wins.
Source: Bloomberg Finance L.P. as of October 2, 2020. Past performance is not a guarantee of future results. Index returns are unmanaged and do not include fees.
If Trump wins a second term, focus on the more domestic segments of the US market that are less exposed to international supply chains. As shown below, breaking down the US market by size and style, mid- and small-cap exposures have the lowest revenue generation from outside the US, while value trumps growth in terms of a domestic footprint.
Implementation Ideas:
Biden: Consider the SPDR S&P China ETF [GXC], which covers over 740 Chinese equities3 up and down the cap spectrum and is balanced throughout the nation’s economic sectors. Additionally, consider the SPDR EuroStoxx 50 ETF [FEZ].
Trump: Consider the domestically oriented mid- and small-cap exposures with the SPDR Portfolio S&P 400 Mid Cap ETF [SPMD] and the SPDR S&P 600 Small Cap ETF [SPSM].
Clean Energy/Infrastructure
Policies: Biden favors using renewable sources of energy and infrastructure as part of a COVID-19 economic rebuild. Trump favors a more traditional approach to infrastructure spending.
Probability: Infrastructure spending could have bipartisan support. However, a “green” focus depends on a Biden victory and a strong Democratic footprint in the Senate.
Plays: If Biden wins, go green and get connected with firms focused on innovating and furthering the use of renewables as well as those designing more intelligent infrastructure. With a Biden victory, clean energy will likely continue its strong run but in a more robust manner — the US now consumes more electricity from renewable power than from coal for the first time on record.4 As shown below, clean energy stocks have significantly outperformed the market and traditional energy stocks in 2020 and since the market’s March bottom.
Under Trump, traditional commodity-based firms may benefit due to the uptick in demand for raw materials to build the roads, bridges and airports under his more traditional spending plan.
Source: Bloomberg Finance L.P. as of October 2, 2020. Past performance is not a guarantee of future results. Index returns are unmanaged and do not include fees.
Implementation Ideas:
Biden: Consider the SPDR S&P Kensho Clean Power ETF [CNRG], as well as the SPDR S&P Kensho Intelligent Structures ETF [SIMS]. Both funds follow a modified equal-weighted approach and, while balanced across the cap spectrum, are a targeted strategy toward these themes by holding 41 and 46 stocks, respectively.
Trump: Consider focusing on traditional infrastructure and materials firms that could benefit if demand for natural resources increases, with the Industrials Select Sector SPDR Fund [XLI] and the SPDR S&P Metals & Mining ETF [XME]. In addition, XME offers exposure to more than just metals, as over half of the exposure is from metal ore mining, uranium, and specialty and performance chemicals.5
Health Care
Policies: Biden will likely focus on COVID-19 response plans, while Trump will continue to place a higher emphasis on weakening the Affordable Care Act (ACA).
Probability: Biden’s response plans can be dealt with via executive orders, so the likelihood that we will see action is high. For Trump, depending on the outcome of the Supreme Court vote, the removal of the ACA could also be likely.
Plays: With more health spending to combat, treat and trace COVID-19, a focus on firms pursuing novel treatments, as well as equipment and testing, may benefit under a Biden administration. Given the left-tailed nature of the vaccine race — where winners and losers are likely to emerge — being appropriately diversified within biotech is ideal. A concentrated portfolio may represent far too much idiosyncratic firms-specific risk. As shown below, relative to a market cap-weighted biotech exposure, for an equal-weighted approach, 60% of the exposure is in 57 stocks, compared with just 17 for a more concentrated market cap-weighted strategy.
Source: Bloomberg Finance L.P. as of October 2, 2020. Characteristics are as of the date defined, and are subject to change.
Under Trump, severe headline risk of progressive health care reform as well as drug pricing on big pharma is likely to lessen. Health Care services firms may benefit as well, with the ACA being less powerful. Back in March 2010, the S&P Health Care Services Select Industry Index fell 10% over the subsequent three months after former President Obama signed the ACA into law.6 The inverse could occur if the ACA is completely removed.
Implementation Ideas:
Biden: Consider the SPDR S&P Biotech ETF [XBI], as well as the SPDR S&P Health Care Equipment ETF [XHE].
Trump: Consider the SPDR S&P Health Care Services ETF [XHS], as well as a broad health care exposure if there is less headline risk with the Health Care Select Sector SPDR Fund [XLV].
Technology/Antitrust
Policies: Biden is likely to be more hawkish toward the power of mega-cap tech firms. Meanwhile, Trump’s first term saw a few testimonies but no real fireworks from tech — unless you consider the record profits they have earned.
Probability: Antitrust review is unlikely to impacted by the results of congressional races. In some instances, executive orders can be implemented to seek similar objectives.
Plays: There is no denying the societal sea change stemming from the COVID-19 pandemic — and the need for innovative technologies will continue to be high.
Under Biden, there could be more room for smaller tech-related firms to prosper as larger mega-cap firms deal with antitrust lawsuits. However, large-cap Technology firms had the best performance and profit growth than any other sector under the Trump administration, rallying by 156% and seeing annual sales climb from $221 billion to $330 billion.7 This will likely continue if antitrust remains less of concern to their operations.
Implementation ideas:
Biden: Consider the SPDR S&P Kensho New Economies Composite ETF [KOMP] or the SPDR FactSet Innovative Technology ETF [XITK]. Both are more balanced across the cap spectrum, as shown below, and not solely reliant on “big tech” to harness the broad change our society is witnessing.
Trump: Consider large-cap-focused exposures, such as the Technology Select Sector SPDR Fund [XLK] or the Communication Services Select Sector SPDR Fund [XLC].
Source: Bloomberg Finance L.P. as of October 2, 2020. Characteristics are as of the date indicated and subject to change.
Look to November and beyond
These key policy issues may take a backseat to some of the headlines scrolling across the screen as we lead up to Election Day. However, they will likely take on a more prominent role once the election is decided. Understanding the issues and the appropriate tools for action is an important portfolio consideration during this election cycle.
For more insights, go to our dedicated 2020 US Elections homepage.