Get Beyond "Red Stocks And Blue Stocks" As Election Heats Up

(Global X) Typically, a lot of what candidates say during a campaign never happens, even in sweep scenarios. In some ways that makes handicapping the sector responses to election results a fool’s errand. But in other ways, that knowledge forces you to ignore the noise and simplify the equation. 

The shape of the economic recovery and the investment landscape will be determined by 1) the timing of a vaccine relative to the continued spread of the disease and 2) what the U.S. does, or does not, do to manage its way out of the crisis.

Quite simply, a lack of action will extend the sickness plaguing the economy. On the positive side, just as certain sectors and themes mobilized to help economies operate in these unusual times, adjustments to current strategies to contain the disease could dramatically affect the trajectory of the recovery and the future.

Nothing is guaranteed, of course. What is said during a campaign and the reality of what is implemented once in office, are two completely different things – its politics after all. This discrepancy is likely to be even greater due to the uncertainty and costs associated with COVID-19. The following are possible scenarios and the potential impact on different sectors of the U.S. economy:

Deep Blue Shade: A Biden presidency and Democratic House and Senate

A Biden presidency in a Democratic sweep would pave the way towards a more progressive agenda fueled by expansionary fiscal policy. In this scenario, healthcare reform and a new drug pricing bill are on the table, as is an infrastructure bill. Tax changes would likely include repealing state and local tax (SALT) deduction and higher rates for high-income individuals. Also, expect tighter environmental and financial regulations, as well as renewed multilateral outreach and new approaches to the trade conflicts.

This scenario is potentially positive for a wide range of industries. Within this scenario, we are likely to see infrastructure projects to help support GDP. This has the potential to be favorable for the transportation industry. Conversely, healthcare reform could bring drug-pricing back into the spotlight.

Lighter Blue Hue: A Biden presidency, Democratic House and Republican Senate

Biden in the White House and Democrats controlling the House but not the Senate means Washington is likely to experience gridlock. In a lighter blue government, transformative fiscal support is unlikely. More likely would be a continued push to rebuild international relationships, regulations that promote technological innovation, environmental protections and moves to keep Wall Street in check. A bevy of executive orders are possible in this scenario, but those are limited in scope and often get caught up in the courts, which now tilt conservative.

As things currently stand, this is the most likely scenario. There is currently more than a 50% probability that we end up in this form of gridlock. While there are still areas of the market that are likely to benefit, without the fiscal support, this scenario is likely to be less supportive for markets.

Same Red Hue: A Trump presidency, Republican Senate and Democratic House

In a repeat of the current executive and legislative breakdown, expansionary fiscal policy is possible, but it would likely mirror what we see now: reactive in nature, driven by the continued economic fallout from COVID. Regulatory action from the Executive Branch would likely continue to focus on areas like immigration and protectionist policies.

Deep Red Shade: A Trump presidency and Republican House and Senate

Currently the least likely scenario, Republicans in full control would mean more of the same fiscal policy tactics, only expedited. Another round of corporate-friendly tax cuts and easing of environmental and financial regulations could be in the cards. And U.S. protectionism would likely increase further, with continued moves away from global partners. 

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