A Tale of Two Outcomes

By Presidio Wealth Partners on July 19, 2024

A Weekend of Developments

Following the shooting at former President Donald Trump’s rally in Pennsylvania last weekend, consensus estimates for which party will take the White House this fall have overwhelmingly moved in the Republican’s favor. As of Monday morning, markets showed a 66% probability of a Trump victory, up from a near 50/50 split for several months leading up to the first debate.

As we know, four months until the election is a long time, and a lot can change by then. With investment implications on the line, we thought we’d break down our opinion on the possible winners and losers across sectors depending on which candidate holds office.

Chart 1: Recent Odds Have Moved in Republican’s Favor[1]

In a Trump Victory, What Works?

Trump and Biden might have the greatest difference between policies among two candidates in history. One of the biggest differences is how the two candidates treat business with foreign countries. Trump reportedly discussed earlier this year that he would consider a flat 60% tariff on Chinese imports – which would more than halve China’s annual growth rate.[2]

Toughening down on China will move manufacturing elsewhere, likely to India. India boasts the largest population in the world, quickly improving its infrastructure under Modi’s leadership, and is projected to grow its GDP above 6% per annum over the next two to three years. A few major U.S. companies, like Apple (AAPL), have already begun moving some operations over to India. AAPL makes one in seven of its products in India, and with possible heavy tariffs on China, more companies will likely follow suit.

A Trump presidency would bring pro-spending, lower regulation, and a high-growth economy to the U.S. This week we have already seen a “Trump trade” take place in Treasury yields as yields have steepened with the long end of the curve moving higher. A higher-growth environment will likely add inflationary pressures, pushing long-term bond yields higher.

Regarding equity sectors, financials, energy, industrials, and real estate will likely perform well. A steepening yield curve will lead to greater net interest income, more economic activity will result in greater lending and borrowing, and less regulation will provide a runway for large-scale M&A. Energy, specifically fossil fuels, stand to benefit with Trump previously stating he would restart oil drilling in Alaska’s Arctic National Wildlife Refuge. Defense spending and investments would also rise, helping companies like Northrop Grumman (NOC) and Boeing (BA). Lastly, housing and a refinancing boom could be a reality under a Trump presidency. The CEO of First Trust Financial recently noted that lower rates would move every industry upward, and we would see another “massive refinance boom along with record home sales”.[3]

What Doesn’t Work in a Trump Second Term?

The themes that likely will not outperform are the opposite: China, low-growth, and risk-off trades. A broadening outside of the Mag 7 as more spending and growth in other sectors is probable. Mega-cap tech has acted like a “haven” trade amid economic uncertainty, given their quasi-monopolistic powers, large cash balances, and mature business models, and a catch-up may be seen under Trump.

Renewable energy, and industries that rely on government subsidies such as solar, would take a hit. Trump will likely cut subsidies for these companies, along with spending overall toward green energy and environmental protection.

Tilts towards low growth and value will be laggers. Trump’s agenda is to push economic growth and expansion, lower corporate taxes, and increase productivity. Overall, stocks are to benefit, coming with higher bond yields.

Chart 2: Trump Trades are Positive in the Past Month[4]

In a Biden Victory, What Works? What Doesn’t?

Under a second Biden term, what has worked over the past three and a half years will continue to perform well. As mentioned above, renewable energy and industries that benefit from government subsidies are beneficiaries. Companies that improve from a reopening of China’s economy following its Covid lag will react positively under a second Biden term; Trump not as much.

Energy has been the best-performing sector under Biden and is up 143% since the start of 2021. Energy pulled away from the other sectors at the start of 2022 and had been mostly trading sideways since mid-to-late 2022. Real estate has been the worst-performing sector, only up 10.8% since the start of 2022. The fight against inflation and the quick rise in interest rates, and thus mortgage rates, has weighed on the sector. Only two sectors, energy, and technology, are outperforming the index since the start of 2021.

Chart 3: Sector Returns Since the Start of 2021, Led by Energy[5]

Looking Ahead

A lot can change in four months. With the Republican National Convention this week, the Democratic National Convention in a few weeks, and another Presidential debate in September among many other political events, there are many factors at play until November. As we shared in our Election Piece, staying invested in diversified portfolios has historically been a solid decision in presidential election years. Markets perform better than average in presidential re-election years, and working to keep emotions aside from investment decisions bodes well for long-term portfolio appreciation.

[1] Source: Strategas. As of July 15, 2024.

[2] Source: Bloomberg. As of July 15, 2024.

[3] Source: Yahoo Finance. As of July 16, 2024.

[4] Source: FactSet. As of July 16, 2024.

[5] Source: FactSet. As of July 16, 2024.