A First Look at the Election and Markets

The morning after “Super Tuesday” in the presidential primaries usually means the stage is set for the upcoming battle between Democratic and Republican candidates for the job of “leader of the free world.” And while there wasn’t much drama this year regarding who would be the two candidates fighting it out from here on, last night’s dominance by former President Trump and current President Biden certainly cemented the fall contest.

So, and I say this with reluctance, as my palate for politics over the past eight years has grown increasingly bitter and caustically unpalatable, it is now time to look at presidential politics and what it might mean for the markets going forward.

In a recent edition of my daily market briefing, the Eagle Eye Opener (which if you don’t subscribe, what are you waiting for?), we took a look at what sectors would likely benefit if Donald Trump wins a second term in office.

Luckily, we have a blueprint for the types of policies that would be implemented in a second Trump term because we had the first term, and we should expect (broadly) more of the same. Importantly, the S&P 500 posted a 37% total return during the first three years of Trump’s presidency, so the first three years were indeed favorable for investors.

So, what sectors are likely to be winners and losers in a “Trump 2.0” administration? To assess this, we looked at the performance data between January 2017 (when Trump took office) until January 2020 (the month before the pandemic, as that event skewed markets and overshadowed normal government policies).

Potential Policy 1: Tariffs on China. Trump has threatened 60% tariffs on Chinese goods and to revoke China’s “most favored nation” trading status. Obviously, those policies would be negative for Chinese shares and emerging markets more broadly, as they would increase trade tensions. So, that’s presumably negative for ETFs such as the iShares China Large-Cap ETF (FXI), iShares MSCI Emerging Markets ETF (EEM) and even the iShares MSCI Emerging Markets ex China ETF (EMXC). How did they trade during the last Trump presidency? From January 2017 to January 2020, FXI returned 12.62%, EEM returned 10.48% and EMXC rose 7.85% compared to a 31% gain for the S&P 500, so Trump’s policies did likely influence China and EM underperformance versus U.S. stocks.

Potential Policy 2: Pushing “reciprocal” trade. Trump has stated he wants to reduce the U.S. trade deficit to $0 and would aim to accomplish that via tariffs (10% was floated by Trump last summer) across virtually all nations that export to the United States. Additionally, Trump has stated he would push “reciprocal” trade to try and eliminate tariffs on U.S. goods via threatening additional tariffs on those nations. This would likely be negative for the iShares MSCI ACWI ex U.S. ETF (ACWX). How did they trade during the last Trump presidency? From our calculated time period, ACWX rose 12.6% so global markets did lag the S&P 500 during Trump’s presidency.

Potential Policy 3: Dismantle Inflation Reduction Act, EVs/green tech. Trump has stated that he wants to dismantle the Inflation Reduction Act via executive actions targeting regulations, executive orders and Department of Justice actions. This would potentially be negative for sustainable investing funds (think Vanguard ESG U.S. Stock ETF (ESGV) and similar ETFs) and clean energy and green ETFs such as the Invesco WilderHill Clean Energy ETF (PBW). How did they trade during the last Trump presidency? During the said time period, PBW rose 53.12% as clean energy stocks outperformed as fears of punitive ESG and green investing policies never materialized.

Potential Policy 4: Boosting oil and gas production. Through reduced regulation, Trump wants to increase domestic oil and gas production. Production did rise during his presidency; however, the results were mixed from a performance standpoint as foreign oil entities (including OPEC) altered production while other forces (the ESG movement) impacted share price performance. This has mixed implications for ETFs such as the Energy Select Sector SPDR Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). How did they trade during the Trump presidency? From January 2017 to January 2020, XLE gained just 3.6% as oil prices were contained while climate focus challenged the long-term investment thesis of many oil and gas companies.

Potential Policy 5: Increased defense spending. Trump wants to increase defense spending and it did rise during his presidency via initiatives such as Space Force and other programs. How did they trade during the last Trump presidency? During our measured timeframe, the iShares U.S. Aerospace and Defense ETF (ITA) rose 41%, outperforming the S&P 500.

Potential Policy 6: Decreased bank regulation. Trump has stated he wants to ease regulation on banks including easing capital requirements. Additionally, he has openly said he wants to replace Federal Reserve Chairman Jerome Powell and that could potentially be negative for interest rates, possibly increasing borrowing demand. How did they trade during the last Trump presidency? During the said timeframe, the SPDR S&P Bank ETF (KBE) rose 13.99% while the SPDR S&P Regional Banking ETF (KRE) gained 11.7%, so both sectors lagged the S&P 500.

Finally, barring a major surprise, the general election matchup will be Trump versus Biden, so familiarizing ourselves with potential policies (and possible sector winners and losers) is important. We’ll continue to refresh this research throughout the campaign as needed, so regardless of who wins the White House, we know what sectors stand to benefit or suffer depending on the new president’s agenda.

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Do It Right

“It is easier to do a job right than to explain why you didn’t.”

–Martin Van Buren

Spend any significant time in an organization of any type (professional, social, family, etc.) and you’ll encounter those that fail to do something properly. Then, instead of owning the issue and just fixing it, they’ll expend great effort to explain why it wasn’t done right in the first place. Even worse, they’ll go to great lengths to explain why it wasn’t their fault.

Don’t be one of those people. Do it right the first time. And if you don’t do it right, then own that and fix it. Forget about the lame efforts to explain the “why.” And especially avoid the temptation to blame someone else. It’s just a waste of time and effort — both for those listening to the explanation and for the person giving one.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

P.S. I will be holding a subscribers-only teleconference on March 13 at 2 p.m. EST entitled “Capturing Huge Gains in a Market Priced for Perfection.” The event is free to attend but you must register here first. Don’t miss out!

In the name of the best within us,

Jim Woods