With November only months away, we thought we would wade into a theme that is constantly in the news cycle: the U.S. presidential election. We are taking a look at the investing themes and stocks that could benefit if either Hillary Clinton or Donald Trump were elected. This post is focused on Trump.
Trump has undoubtedly shaken things up with his tough-talking, no-holds-barred policy proposals and shoot-from-the-hip remarks. The possibility of Trump taking office has many people wondering how that could affect both the stock market and the U.S. economy.
History has shown that election years can affect stock market performance. For example, the S&P 500 has dropped an average of 1.2 percent in year eight of presidential terms since 1990. When the race for the presidency is tight, a lot can happen.
Certain industries, along with the economy as a whole, can rise and fall both before and after an election takes place. Volatility in the stock market can increase, especially if a new party comes into power.
Could Trump and Brexit create the perfect storm?
Although it’s impossible to know who will win this November, many speculate that a Trump presidency would cause a great deal of uncertainty across the nation. High levels of uncertainty have the potential to cause a shakeup in the stock market. Add in the recent shock stemming from Brexit, you have increasing magnitude of uncertainty facing the global economy.
Some analysts have drawn parallels between the fears and longings of many Brexit supporters and those of Trump supporters. The concerns include rising immigration coupled with a sense of racial or ethnic identity loss, job losses or displacement due to illegal immigrants, a desire to take back their country by closing off the borders and voting out the elite establishment.
Concerns have also surfaced that Brexit supporters didn’t believe their votes mattered. The narrative is that they didn’t fully understand what they were voting for, unaware of the economic and political ramifications. After seeing significant drops in the FTSE 100, British pound and rising political tensions many Britains have expressed “regret-xit,” wishing they could change their vote. This have led some to wonder if many Trump supporters also don’t have a handle on what a Trump presidency would mean or how his proposed policy changes could affect the U.S. economy and political tensions.
Here are a few themes you may want to watch under a Trump administration:
Fixed income. It one thing is for certain, it’s important for investors to keep their pulse on the political and economic uncertainty domestically and abroad. Uncertainty tends to breed stock market volatility, which in turn often pressure markets. As fear starts to spread, emotional investors start to panic and sell, consumption slows the economy stagnates.
Since there is a lot of uncertainty surrounding a Trump presidency, you may want to consider getting defensive with your portfolio. Increasing exposure to fixed income or shorting the market are some ways that experienced investors choose to be defensive when a downwards knee jerk reaction in the market could occur.
A simple way to diversify your portfolio is to add exposure to bonds, which often outperform equities when markets are down. For example, global bonds returned an impressive 12 percent in 2008 during the financial crisis and 8 percent returns following the dot.com bubble in 2000, 2001 and 2002.
U.S. treasuries and municipal bonds are generally deemed to be safe no-risk assets due to their low likelihood of default and liquidity. Take a look at the performance of the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) below compared to the S&P 500 over the last several weeks. When the world was in shock that Brexit passed and it started to take a toll on the markets, IEF was on the rise.
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EF was launched July 22, 2002 and seeks to track U.S. treasury bonds with maturities ranging between seven and 10 years. Source: NASDAQ
If you believe a further slowdown in the markets is forthcoming, take some time to review your portfolio asset allocation. You may want to rebalance your portfolio if your ratio of stock to bonds has gotten skewed. If you aren’t certain how to best construct your portfolio, you can learn more about common asset allocations by age.
Guns, security firms and private prisons. Protecting second amendment rights is one of Trump’s many promises to make America great again. His plans to make gun permits valid in all 50 states, allow firearms at military bases and recruiting centers and lift gun and magazine bans could bode well for the firearm industry, which has already been doing well this year.
Trump’s priority of cracking down on illegal immigration would hurt most businesses and taxpayers, but it could benefit government defense contractors as well as security firms and private prisons used to detain undocumented immigrants waiting to be processed and deported.
Trump is supportive of private prisons and thinks they work better than publicly funded ones. Hillary Clinton disagrees. Last fall when she tweeted she wants to end private prisons to protect public safety, prison stocks took a quick hit with Corrections Corporation of America falling over six percent and the GEO Group dropping 4.2 percent.
Related Motifs: Guns, Guards and Gates
Coal. The coal industry has had it rough under the Obama administration due to tighter environmental controls on burning coal and the suspension of coal leasing on federal lands. Hillary Clinton, who strongly favors clean, renewable energy sources like solar power, would likely uphold Obama’s policies or perhaps tighten them even further.
Donald Trump, on the other hand, has pledged to bring the coal industry back to life. Earlier this year at Radford University Trump said, “We’re going to bring the coal industry back 100 percent.” That’s quite a tall order if you look at the numbers, and many struggling coal communities are banking on Trump taking office for their survival.
The coal industry experienced a significant 80 percent decline in 2015. Back in early 2008, coal provided about half of the electricity in the U.S. This year, it only comprises about 30 percent. Government restrictions and declines in domestic and international demand have hit many coal companies hard. Arch Coal filed for bankruptcy in January and Peabody Energy, the world’s largest private-sector coal producer, recently followed suit in April.
Although 2016 has been a difficult year for coal stocks, some predict the outlook for 2017 is better. The U.S. Energy Information Administration recently released its projections showing a four percent increase in U.S. coal consumption in 2017.
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More than 90 percent of total U.S. coal consumption comes from the electric power sector. Although the EIA predicts a 10 percent decline in 2016, they forsee a 4 percent increase next year. Source: EIA
Trump plans to put unemployed coal workers back on the job and take advantage of overseas demand. Whether or not Trump could actually loosen regulations and help save the struggling industry if elected remains unclear.
Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.
Fixed income investments are subject to various unique risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Fixed income securities are subject to increased loss of principal during periods of rising interest rates.
 Borzykowski, Bryan, “Why Markets Tend To Fall During A Presidential Election Year,” CNBC, January 13, 2016.
 Lemire, Jonathan, Jill Colvin, “What do the Brexit ‘leave’ voters and Trump supporters have in common?” PBS, June 26, 2016.
 Hicks, Katherine, “Regret-xit: why some Brexit supporters wish they could take back their vote,” Vox, June 24, 2016.
 Borzykowski, Bryan, “The assets that do best in a market downturn,” CNBC, January 22, 2016.
 Epstein, Jennifer, “Hillary Clinton rattles prison stocks with a single tweet,” Bloomberg, October 30, 2015.
 Wilkinson, Francis, “Coal country is desperate for Donald Trump,” Bloomberg, April 25, 2016.
 Borzykowski, Bryan, “Why Presidential Election Years Are Bad For Stocks,” The Fiscal Times, January 13, 2016.
 Krauss, Clifford, “Coal production plummets to lowest level in 35 years,” The New York Times, June 10, 2016.
 Riley, Charles, Chris Isidore, “The largest U.S. coal company just filed for bankruptcy,” CNN Money, April 13, 2016.