Schwab Sector Views: Election Special
Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.
Unless you’ve had the blessing of living under a political rock, we aren’t breaking any news that there is a presidential election right around the corner. While surveys such as those conducted by Gallup have shown that these are the most-disliked presidential candidates in modern U.S. election history, and the campaigning seems at times to be dredging new lows, there could be investment implications based on whether Democrat Hillary Clinton or Republican Donald Trump wins. Although there are numerous reasons to choose one or the other beyond financial, we will attempt to provide a view on what sectors may receive a tailwind, or encounter a headwind, depending on the result.
- Clinton: Following admissions of fraud by a major bank and resultant hearings on Capitol Hill, the financial sector is again in the spotlight. There is little doubt to us that a Clinton win would encourage the debate for further regulating and restricting certain types of financial institutions. Members of the Democratic Party have recently advocated for breaking up large financial institutions and perhaps turning many of them into something more like regulated utilities. How far they would get depends on the makeup of Congress, but it would likely add to headwinds for the sector.
- Trump: As with many issues, due to his lack of political history and a lack of policy proposals with specifics, it’s difficult to gauge the impact a Trump win would have on financials. On the one hand, there could be some relief as Trump has indicated that he would reduce regulations and provide a friendlier environment for financial companies. However, uncertainty about exactly what that means could cause some initial volatility. Also, he has expressed disapproval of current Federal Reserve policy and current Fed Chair Janet Yellen, which would also likely add to some uncertainty with regard to future monetary policy.
- Trump: This is an area where Trump has provided some specifics. He pledges to get rid of the Affordable Care Act (ACA), in keeping with much of the rest of the Republican Party’s goals. While his ability to accomplish that would be largely dependent, again, on the makeup of Congress, insurers and hospitals could initially see some concern, as they were a couple of the industries that benefited most following the passing of the ACA according to stock price gains. On the flipside, drug makers and biotech companies would likely rally on a Trump victory, in our view, as the threat of more government intervention and potential price controls would be viewed as reduced.
- Clinton: Clinton has made it clear that she will embrace the ACA and attempt to expand on it should she win. Recently, in the New England Journal of Medicine, she advocated a public insurance option in every state. This could negatively affect insurers as it would likely reduce pricing power, but could benefit hospitals further as more people pick up insurance. And we already saw a glimpse of what may happen as biotech stocks dropped followed a Clinton tweet accusing drug makers of “price gouging,” which we believe could resume with a Clinton win as concerns rise over potential price controls.
- Clinton: This sector might be among the clearest beneficiaries from a Clinton victory, in the form of alternative energy. We’ve seen solar stocks jump on government subsidy plans, and drop sharply when rumors indicated those subsidies might be cut. She has been quite clear that she advocates further advances in alternative energy. Between pushing for further subsidies alongside limiting the amount of fossil fuels and mandating the use of “renewable” energy, it is highly likely in our view that a Clinton win would benefit the alternative energy world, at least initially.
- Trump: And here’s another place where we see a clear difference between the two candidates. Trump has expressed skepticism over the extent of manmade climate change, which would seem to limit the attractiveness of massive government investments in alternative sources of energy to a Trump administration. Further, he has been an advocate for American energy independence through largely traditional sources, including using fracking, to achieve that goal. We believe that traditional energy companies would benefit from a Trump victory.
- Both: We want to contribute to the coming together of the two parties, so we’ll end with an area where both candidates tend to at least broadly agree, although neither of them will admit it: infrastructure spending. Clinton has proposed doubling spending on infrastructure to $275 billion a year, while Trump has proposed increasing spending by twice that amount. The devil is in the details, of course, but we believe the broad industrials sector could get a fiscal tailwind from both candidates. However, a large caveat, as always, remains in that if the president's party differs from the congressional majority, getting anything of substance agreed upon is questionable at best.
This is certainly neither a comprehensive list nor a recommendation to do anything at this point —beyond voting! These are areas that we have flagged as segments of the market to watch as election returns come in. The political component is only one area that affects stock performance, and often it’s a relatively small and unsustainable one, but that doesn’t mean it should be ignored. Being prepared and paying attention to these issues is important for investors who may wish to make some shorter-term moves around the edges of their portfolios.
Schwab Sector View
Date of last change to Schwab Sector View
Share of the
Year-to-date total return as of 10/11/2016
S&P 500® Index (Large Cap)
Source: Schwab Center for Financial Research and Standard and Poor's as of 09/30/2016.
Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.
What is Schwab Sector Views?
Schwab Sector Views is our three- to six-month outlook for 11 stock market sectors, which are based on the 11 broad sectors of the economy.
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: Likely to perform better than the rest of the market.
- Underperform: Likely to perform worse than the rest of the market.
- Marketperform: Likely to track the broad market.
How should I use Schwab Sector Views?
Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor's 500 allocations to each sector, listed in the chart above, as a guideline.
Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views' outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.
Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it's time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks.
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Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.
The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.