How will the United States presidential election affect the stocks in different sectors

In this post I will look into how the outcome of the United States presidential election will affect different sectors, which might will give you some ideas how to act in these uncertain times.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

If you follow me on eToro, you might have noticed that I have participated in various discussions about upcoming presidential election in the United States. It is a topic that interest me as I have a masters degree with a major in American Studies (with focus on both North- and South America) and a minor in European studies.

In most discussion on eToro, people are only focusing on the presidential election, while the congressional election is left out of all discussion. While the president does have the opportunity to give executives orders (which all presidents do), I think you cannot ignore the legislative branch of the in such a discussion. I don't want to go into a longer explanation of how the U.S. Government is organized but the congressional election will obviously have a an impact in which sectors will be affected by the election. There are many outcomes in the election and for convenience this analysis will be based on either of the parties winning the Presidency, the Senate and the House. In case candidate that wins the presidential election doesn't get majority in both the Senate and the House, we see a less decisive outcome from the election.

Big Tech

The first sector is the tech sector. I suppose most people are aware of the 449 page long report by the antitrust subcommittee of the House Judiciary Committee, which is investigating if the big four companies Amazon, Apple, Facebook and Google have used monopolies to suppress competition, while the Republicans so agree with some of the report, it is indeed a Democratic report, and if the Democratic party win the presidency, the majority in both the House and the Senate, you might end up seeing legislation that will prevent big tech from growing in the pace it has been growing so far.

Another factor where the candidates and their parties differ in on taxes. You might remember that Trump cut corporate taxes from 35 % to 21 %. If Biden and the Democrats wins, he would like to raise corporate taxes from 21 % to 28 %, while this will apply for all companies, there is one aspect that will hit tech harder than others, as they have historically kept their taxes low by stockpiling overseas earning, in order to deal with that Biden has proposed to raising the minimum rate on foreign earnings from 10,5 % to 21 %, which would especially hurt the aforementioned companies bit also Microsoft and Netflix. Hence, it seems like that a Trump win would be best for big tech

Pharmaceuticals

Talking pharmaceuticals many people would connect it to Obamacare and obviously think that Obamacare was bad for pharmaceuticals. Considering that Joe Biden was Vice-president under Obama, it would let one to believe that Biden shares opinion about health care with Obama, this idea is supported by the following quote on Joe Biden’s website: “When we passed the Affordable Care Act, I told President Obama it was a big deal – or something to that effect.”

Hence, I thought it would be a good idea to very shortly go through what Obamacare really is. Obamacare, which is also known as the Affordable Care Act is in its essence a law that allows all Americans to have access to affordable health insurance. While it brought deep pay cuts to Hospitals and Insurance companies, it didn’t really affected Pharmaceuticals or the price that can get for their products, as nothing in the Obamacare oblige Pharmaceuticals to lower their prices. So what do Biden plan to do? On his website he announces that he wants to “build on the Affordable Care Act by giving Americans more choice reducing health care costs and making our health system less complex to navigate”. While this is more directed at Insurance companies etc. he does shortly mention price negotiations, I do not want to get into too much details but due to Medicare Part D, it isn’t really possible as companies could be reimbursed for drugs that do not provide value for money.

Trump was certainly not a part of the Affordable Care Act. But he has actually done signed an executive order called “Most Favored Nation Price”. In short it means that Medicare would not pay more for a drug than the lowest price in any OECD country. The most favoured price means “the lowest price, after adjusting for volume and differences in national gross domestic product (GDP), for a pharmaceutical product that the manufacturer sells in any member country of the OECD that has a comparable per-capita GDP.” While Pharmaceuticals obviously were not happy with the executive order, it doesn’t seem to significantly lower the prices on drugs in the US do to the aforementioned criteria.

When looking at donations for the candidates, it is evident that Pharmaceuticals and Health Products favour Biden over Trump, as they have donated $6.888.899 to Biden and $1.671.676.

Looking at the Congress, Pharmaceutical PAC’s (Political Action Committee) are certainly not being lazy. Ahead of this years election they have supported 356 lawmakers in both the Senate and the House. Traditionally the pharmaceutical PAC’s have usually support the Republican party the most, however it seems like there is a shift this year, where they seem to give a bit more support to the Democrats even though it is almost 50/50, which is also why I’m not too concerned for pharmaceutical companies no matter who wins the election, even though it seems like they prefer Biden to win the presidential election.

Renewable energy

It is no secret that Trump is not a big supporter of renewable energy, as he has called the climate change a hoax and removed the US from the 2015 Paris climate agreement. Trump is a self-appointed expert on wind energy and has said “I’ve studied it better than anyone I know”. He has also previously claimed that wind turbines cause cancer and depress property values. Nevertheless one thing is what he has said, let us look into what he has done. He has issued an executive order to reduce regulatory barriers to oil, natural gas and coal development, while he four days after taking office resurrected two big pipeline projects (Keystone XL and Dakota Access) that had been rejected or sidelined during the Obama administration. While he has imposed tariffs on solar panels, which the Solar Energy Industries Association estimated has caused more than 62.000 job losses and nearly $19 billion investments in the industry.

On the contrary Biden seems to be a big supporter of renewable energy. He has announced that he wants to rejoin the 2015 Paris climate agreement. In August he announced a $2 trillion ten year climate plan, and that plan includes $400 billion investment over the next ten years in clean energy and innovation, while he also wants to accelerate the deployment of clean technology throughout the US economy. By accelerating the deployment of clean technology he means reducing the US carbon footprint by 50 % in 2035, deploy 500.000 charging outlets by 2030 (I guess all you Tesla guys enjoy that part) and ensure that the US agricultural sector will be the first in the world to achieve net-zero emissions (while the farmers earn their income).

I guess it is no surprise for anyone that Biden is good for renewable energy while Trump is bad. I just think that the numbers give you some context. What we could see from the numbers from Biden is that $400 billion would go directly into investments in clean energy and innovation, while it is hard to account for the rest of the plan. Hence, it is a bit hard to compare Biden’s plan with the EU. The EU wants to use €1 trillion investments in making the EU economy more environmentally friendly over the next ten years. Besides that Ursula von der Leyen has announced that 37 % of the €750 billion coronavirus recovery fund should be spent on environmental objectives, and that she wants to cut the greenhouse gas emissions by at least 55 % in 2030, previously the target was 40%. I don’t know what seems most ambitious, however I lean towards the EU plan, especially if the Republicans keep the majority in the Senate.

Chinese and European stocks

Unless you have been living under a rock, you certainly already know Trump’s feelings toward China. In his first presidential period he started a trade war with China and in his campaign, he vowed to reduce the U.S trade deficit with China. While the trade war is still going on (some tariffs were lifted in January), the U.S trade deficit with China has hardly improved during his term in office. It doesn’t seem like Trump will change his stance on China in case he should win reelection, as he seems more motivated by domestic trade and economy than geopolitical concerns. However, we have previously seen other president loosen up in their second term, one notable example is Clinton on Cuba. Nevertheless, it is hard to predict how Trump will deal with China in case he wins a second term but according to the director of the National Counterintelligence and Security Center, China doesn’t want Trump to win as they see him as unpredictable

Biden has massive experience in foreign policy, and you might remember it was one of the main reasons that he was chosen as Obama’s running mate. Hence, he seems to have a more balanced and nuanced view on China. While he does believe that the U.S. needs to be tough on China to counter intellectual property theft, he has also slammed the tariffs that Trump imposed on China, as Biden believes it has hurt American business (especially farmers) and consumers due to the retaliation from China. If Biden wins you most likely will see a shift in the U.S. policy towards China, as he will focus more on diplomacy and cooperation in areas of mutual interest. However, Biden has also criticised China for their actions in Hong Kong and their repression of the Uighurs.

It is not only Chinese stocks that can be affected by the election. European stocks will most certainly also be affected by the election. You might have noticed that we have seen some tension in the U.S. and EU relationship since WTO ruling illegal state aid from the U.S. to Boeing and gave the EU permission to impose duties on $4 billion worth of U.S. goods. Obviously Trump didn’t take the news good and stated “the U.S. will strike much harder if the EU goes ahead with that plan, and followed it up with “If they strike back, then we strike much harder. They don’t want to do anything, I can tell you that”. Trump does have a point though, as the U.S. hasn’t applied the $7,5 billion tariff they were awarded from WTO due to a parallel dispute against the EU and Airbus. Previously Trump has accused “Europe to be almost as bad as China over the years”. While he already has imposed tariffs on steel and aluminium, he has also threatened with huge tariffs on other European products such as cars.

On the contrary Biden has said that he would end “the artificial trade war” with Europe. And his top foreign policy adviser has said that the U.S. need improve their economic relations with the EU. The same adviser also said that Trump by poisoning the relations with the EU he has been pushing higher cost on to American consumers and continued with “instead of hurting our own citizens and fighting with our democratic allies, we ought to work to be working on a fair approach to international trade and investments.”

Defense

If you have followed my posts on eToro long enough, you might remember that I wrote an analysis about my purchase of LHX 4 months ago, where I among other things, touched the subject if Biden should become president. Even though a lot of time has passed since, I still think it is valid today. I don’t expect you to scroll through 4 months of post in my profile so I will go through it again.

I projected that Biden victory would mean that the defense budget would be cut with approximately 5 %, while it wouldn’t hurt companies such as LHX that operates in high technology systems. Since my last analysis Biden has said that “he doesn’t foresee major reductions in the U.S. defense budget as military refocuses its attention to potential threats from near-peer powers such as China and Russia”. However, Biden will be under pressure from the more progressive wing of the Democratic party as they would like to cut the defense budget with as much as 10 %. It seems unlikely it will be cut by that much, but Biden will surely feel the pressure from his own party. If the defense budget will be cut it would affect some but not all defense companies, as it seems like Biden prefers to scale back overseas engagements and spend more on high technology. These quotes from Biden reassures me that I might be right: “We have to focus more on unmanned capacity, cyber and IT, in a very modern world that is changing rapidly” and “I’ve met with a number of my advisors and some have suggested in certain areas the budget is going to have to be increased.”

On the other hand Trump is not expected to cut the defense budget, while he it not expected to increase it neither but it is expected to stay flat. However, you have to aware that during Trumps first term we have seen numbers in the defense budget increase from $700 Billion in 2017, $716 Billion in 2018 and $733 Billion in 2019. Just like Biden, Trump would also wants to scale overseas engagements and would like to bring U.S. troops home. Trump would also like focus on high technology in the defense budget. In the beginning of 2020 (pre Covid-19) he proposed to increase the defense budget to $740,5 Billion in 2021, and emphasised that the budget lies on high-tech defense capabilities for specialized drones, cyber warfare, AI, use of the cloud in the battlefield, and advanced communications. You might have noticed that Trump’s relationship with top defense leaders has been strained as of late, while nothing suggests that he would cut in the defense budget, there is a hearing in the U.S. supreme court about the Trump administration using Pentagon funding to pay for a portion of the border wall to Mexico.

If you look at defense political action committees (PAC’s). You will see that they have donated a bit more for Biden $1.340.057 than for Trump $1.119.950. However, if you include candidates for the House or Senate they do donate more for Republicans than Democrats.

Contested election

Let me just shortly explain what a contested election is. A contested election is defined as “a post election challenge of which the legality or validity of the result is challenged by the losing candidate of a a primary or general election. Contested elections usually occur due to an election that is too close to call, a statutory automatic vote recount or due to a substantiated allegation of election fraud.”

I don’t want to go into too much details about the chances for a contested election, as this post would then end up being more about American politics than the stock market. However, I can tell you that there are certainly a chance that we will see a contested election this year, as we have seen a much larger margin of mail-in and provisional ballots than usual due to Covid-19, meaning the outcome could actually be unsettled for days or weeks until 8th of December- The 8th of December which is the so-called safe habour deadline where the states need to have sorted out the results. Rumours have it that Trump’s state and national legal teams are already laying the groundwork for postelection maneuvers that would circumvent the results of the vote count in some states. All of this means that the chance we see a contested election is higher than usual.

While there is a chance that the election will be contested, it surely isn’t a certainty. Through out history the presidential election has only been contested four times in 1800, 1824, 1876 and 2000. I know all of this haven’t really been about the stock market but I think it would give you some context about the likelihood of a contested election.

So what happened to the stock market during the contested election in year 2000? Before going through the numbers keep in mind that we were seeing a dotcom bubble bursting in year 2000, it is not what we see today, even though some believe that we are actually seeing a tech bubble ready to burst at the moment. In year 2000 it took five weeks to know the outcome of the election (the safe labour deadline is always 5 weeks after the election). Looking at the numbers from year 2000 the SP500 fell 8,1 % (but recovered to only have lost 4,1% once Bush was announced), while Nasdaq fell 24 % by the end of November. In the meantime Gold and Bonds such as TLT increased in value during the contested elect.

Obviously you cannot be sure that the same thing will happen in case we see a contested election. Last time was during the bursting of the dotcom bubble, which further affected the stock market. However, I do know that the market doesn’t like uncertainty and it will be very interesting to see how it will act, if we see a contested election, and you better be prepared.