We move deeper into interesting times. Since our last quarterly newsletter:
On May 31, a New York jury convicts former President Donald J. Trump on 34 felony counts of fraud.
On June 27, President Joe Biden submits a candidacy-ending performance in a debate with Trump.
On July 13, Trump survives an assassination attempt.
On July 21, Biden steps down as the Democratic candidate while throwing his support behind Vice President Kamala Harris. Overnight the one-time San Francisco District Attorney becomes the presumptive Democratic nominee for President of the United States.
Before we forget … on May 16, the Dow Jones hit 40,000 for the first time.
With this Torrent of the Unprecedented, what is a long-term investor to do? Answer: nothing in particular — if we use 90 years of market history to guide us. Of course, none of us goes through life simply “as an investor.” But here we make the case for prudent detachment of one’s politics from how to best manage a portfolio.
Remaining cool will be tough as political heat becomes white hot before November 5. This week, for example, one of the candidates had to defend denigrating remarks he made about “childless cat ladies.”
This November, our office will issue a Thanksgiving advisory on how to avoid political debates at the holiday dinner table. We promise to be the first ones to read it. Now, onto where the money is likely to be made …
As government can pick winners, some industries do better with one party over another. This would be reflected in constituent stock prices, a dynamic we entrust our various fund managers to monitor and exploit for the benefit of our clients.
If Democrats prevail in November, expect these industries to benefit:
Telecommunications. Broadband funding will be expanded to shrink the “digital divide”—echoes of the rural electrification championed by FDR.
Homebuilding and Industrials. Increased immigration, coupled with overdue immigration enforcement and reform, should shrink labor shortages while dampening wage inflation (a position long advocated by the U.S. Chamber of Commerce).
Technology and Manufacturing. Expect continued stimulus spending to onshore the production of microchips and other strategic products, thus reducing dependency upon America’s chief adversary, China.
Renewable Energy and Electric Vehicles (EV). With stronger environmental regulations, our economy becomes less dependent on fossil fuels which bear inflationary as well as environmental impacts. Subsidies, like those that have enriched Tesla’s Elon Musk, may remain critical to the steady adoption of EVs.
With a Harris administration, let’s assume a continuation of Biden’s priorities: increased taxes, massive student loan relief, continued Ukraine aid, expanded health care coverage, and attempts to limit rent increases for federally subsidized residential property.
If Republicans prevail, expect these industries to receive favorable treatment and possibly enhanced stock valuations:
Oil and Gas. Domestic drilling and mining will be less regulated and will receive further tax benefits along with additional permits to drill offshore and on public lands.
Banks and Financial Services. Weaker regulation, including lower capital requirements for banks. Seeking freer rein for cryptocurrency, tech billionaires have spent more than $150 million lobbying both sides of the aisle in Congress, in part, to weaken the Securities and Exchange Commission.
Health Care. Proposed deregulation promising to promote competition and efficiency in a sector that gobbles up almost one-fifth of the nation’s GDP. There could be a shifting of public dollars to privatize some current services.
Big Pharma. With an average of three registered lobbyists per each of the 535 members of Congress, pharmaceutical companies would have a better chance of defending the existing pricing regimen for patent and generic drugs.
Given Trump’s erratic style, his advocates say to take him seriously, not literally. Nonetheless, the former President has consistently advocated additional tax cuts, broadly applied tariffs, mass deportations, exiting NATO, and ending Ukraine aid. Whatever its priorities, a second Trump administration – with legions of acolytes now at the ready - would be far more proficient than the first in pursuing its policy objectives.
Our Foreign Exposure
If the US exits NATO or ends Ukraine aid, as Trump has suggested, we cannot precisely predict the resulting economic disruption. That would depend on the specific circumstances of the exit, responses from NATO allies, and the broader geopolitical environment, including Putin’s ambitions beyond Ukraine and China’s expansionist aims.
Disparate Partisan Realities
Today, despite robust financial markets, abating inflation, full employment, etc., most Americans hold a dim view of the economy—dimmer still if one’s party doesn’t occupy the White House. Pew Research Center has observed this phenomenon over several administrations. As of May, only 37% of Democrats rated the economy as doing good or excellent. For Republicans, that number was 10%.
Despite the mood and noise, markets are doing well. In fact, markets generally do well in presidential election years, with choppiness during primary season and then movement upward after November, when everyone starts to breathe again. (Future results will vary.)
Looking at 1933 and onward, it appears financial markets will perform well enough in the long term regardless of which party is in power. It follows then that investors are that much freer to vote their values. Hopefully, the following chart provides some assurance to the most anxious among us.
Source: Capital Group
Going to the polls this year, you will have plenty of company. Surveys predict record turnout. Perhaps 80% of eligible voters will cast ballots.
On either side of Election Day, trust that our investment philosophy and process remain the same. We welcome the opportunity to review your investment portfolio and any financial planning questions you may have.