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Credit Suisse issued an 'Election Survival Guide' for U.S. stocks. The report concludes that a Democratic Sweep would be a mildly negative to mildly positive event for US equities (+/- 4%). Under a Clinton win with a split or Republican Congress, they anticipate a neutral to moderately positive move in US equities (0 to +7%). Under a Trump win, they think US equities would fall (base case is for a downward move in the 5-10% range).
Looking at valuation, the firm says if stocks rally post election, they suspect the unweighted, median S&P 500 NTM P/E will be capped at its 2004-2006 and 2016 peak of 18.6x – the move from its Nov 7th close (17.3x) would take the S&P 500 up a little over 7% to 2285 (on constant earnings). If stocks fall, they would initially look for the S&P 500 P/E to fall to its 2015-2016 trough of 16.6-16.7x for a drop of around 3.7-4% from Nov 7th’s close (around 2046-2053 on the index). A deeper pullback could take the P/E down to its long-term average of 15.5x, implying a move to 1904 in the S&P 500 or a 10.7% drop on the index from Nov 7th levels.
On the historical playbook, they think the key thing to remember is that YTD gains or losses in the S&P 500 before a Presidential Election tend to be followed by a continuation of the same trend after election day. When the S&P 500 rises post Election Day, the average climb from Election Day’s close to year end is 4%, a range of 1% to 9%. When the S&P 500 falls after the Election Day, the average drop from Election Day’s close to year end is -5%, a range of -1% to -9%.
The firm's Technical Strategy team anticipates a neutral to negative reaction under a Democratic sweep (decline of 4% vs. Nov 7th’s close), a mildly positive reaction under a Democratic victory with a split or Republican Congress (gains of 1.1-2.3% vs. Nov 7th’s close), and a negative impact under a Trump victory (downside of 4-6.6% vs. Nov 4th’s close).
Below is the firm's take on various sectors:
Health Care Facilities & Managed Care:
Democratic Sweep: el Good for acute care hospitals, Medicaid managed care companies; bad for diversified managed care companies; but there is a risk of some short term pressure on all of these groups due to potential rotation out of HC generall
HRC Wins w/Split or Rep Congress: Good for acute care hospitals, Medicaid managed care companies. Neutral for diversified managed care companies as this would represent continuation of status quo. But all groups may benefit within the sector on a broad relief rally in markets
Trump Victory: Good for diversified managed care companies, bad for acute care hospitals and Medicaid managed care companies. But all groups could benefit short term from defensive trade into HC as rest of market goes down and sector seen as benefiting from less of a watchdog on the industry in the ova
Pharma & Biotech
Democratic Sweep: Negatively impacted as possibility of HRC being able to get her agenda through Congress piles on to generic drug pricing probe issue, general concerns on drug pricing issue likely to overwhelm the historical tendency of the stocks to outperform post election.
HRC Wins w/Split or Rep Congress: Muted reaction expected. Relief rally in markets would likely benefit HC sector, along with historical tendency to lag ahead of elections and outperform after and view among investors that the stocks have gotten cheaper. But worries about the generic drug pricing probe will linger
Trump Victory: Might see a modest relief rally, as Trump is viewed as potentially less onerous than Clinton on drug pricing. Concerns around drug pricing may still mute significant outperformace as rest of market goes down, especially for generic companies given the specific probe on generic drug prices
Democratic Sweep: Less likely to participate in a relief rally in the short term, given increased chance that HRC agenda gets enacted and higher risk of more challenging regulatory environment for the group
HRC Wins w/Split or Rep Congress: Likely to participate in a broader relief rally in US equity markets in the short term, as this outcome would represent continuation of status quo and path for a December rate hike would likely remain intact. Concerns about heightened regulatory environment likely to return, but timing unclear
Trump Victory: Near-term impact likely to be negative, especially if market turmoil manifests, as it would cloud the path to rate hikes. Although Trump might be viewed as better for the group longer-term from a regulatory perspective, rate hike is most important issue near-term given current implied probability of Fed moving in December & how much bank stocks have run
Democratic Sweep: Small negative for consumer finance sector broadly and student lenders in particular – more extreme impact than under a split or Republican Congress
HRC Wins w/Split or Rep Congress: Small negative for consumer finance sector broadly and student lenders in particular – less extreme impact than under a Democratic sweep.
Trump Victory: Positive for student lenders
Democratic Sweep: Negative impact for for profit post-secondary sector. Major rewrite of Higher Education Act codifying Obama rule changes and likely introducing onerous new requirements that could pressure enrollment and balance sheets simultaneously. Positive impact for technology and content providers to colleges and universities. Near certain passage of federal funding for community college, boosting undergraduate enrollment significantly.
HRC Wins w/Split or Rep Congress: Neutral to negative impact on for profit postsecondary sector. Transition team staffed with high-profile critics of sector. Every indication is that aggressive scrutiny will continue unabated. Neutral for technology and content providers
Trump Victory: Positive for FP post-secondary sector. Comments regarding de-regulation and defunding of Education Department suggest possible roll-back of Obama rules, defanging of CFPB and dissolution of FP oversight interagency task force. Positive for corporatesponsored early-childhood providers which would benefit from Trump tax proposals. Neutral for technology and content providers.
Democratic Sweep: Mixed implications. Greater potential for a federal minimum wage hike under a sweep than under a split Congress. Gun related companies may benefit short term
HRC Wins w/Split or Rep Congress: Mixed implications. HRC more trade-friendly than Trump and housing investment program could help Home Improvement names. But minimum wage hike could pressure operating expenses
Trump Victory: Mixed implications. No min wage increase good for many retailers and increased domestic oil production/cheaper gas could be positive for Auto Parts. But higher tariffs on imports could pressure margins
Democratic Sweep: Negative reaction due to fear of federal minimum wage moving higher. Consensus forecasts do not account for a potential increase to the fed wage in our view. Companies with low franchise mix would likely see the most severe reaction given high sensitivity to changes in labor costs.
HRC Wins w/Split or Rep Congress: Similar but less acute reaction relative to a scenario in which Clinton wins the presidency and Democrats sweep Congress. The probability of pushing through an increase in the fed wage in the near-to-medium term is lower under this scenario.
Trump Victory: Muted to modestly negative reaction. Probability of a fed wage hike is much lower under a Trump presidency. However, further populism and political strife seem more likely under a Trump presidency and could harm consumer sentiment, which is a major driver of consumer spending on restaurants.
Democratic Sweep: Defense spending should continue to trend up following a bottom under Obama as Clinton is slightly more hawkish than Obama. This would positively impact most defense contractors and government service providers.
HRC Wins w/Split or Rep Congress: Less positive than a democratic sweep or Trump victory as the potential for new policies to get passed is diminished.
Trump Victory: Trump has already called for the elimination (and reversal) of Sequester which has pressured defense budgets during much of the Obama Administration. This would positively impact most defense government service providers
Machinery / E&C
Democratic Sweep: Positive impact from Clinton’s infrastructure plans. Would expect Clinton’s Energy proposals to put pressure on midstream and upstream focused contractors
HRC Wins w/Split or Rep Congress: Less positive than a democratic sweep or Trump victory as the potential for new infrastructure policies to get passed is diminished.
Trump Victory: Positive impact from infrastructure (Trump is viewed as supportive of infrastructure spending) and Energy plans (Trump’s energy plans would likely reduce regulation, midstream focused contractors would benefit from any potential slow down in coal fired generation retirements, and potential for coal fired new build)
Electrical Equipment / Multi Industry
Democratic Sweep: Positive impact from infrastructure plans and defense spending (Clinton is viewed as more hawkish than Obama
HRC Wins w/Split or Rep Congress: Less positive than a democratic sweep or Trump victory as the potential for new policies to get passed is diminished
Trump Victory: Positive impact from infrastructure plans, Energy (Trump is more supportive of fossil fuels as a source of power generation) and defense spending.
Democratic Sweep: Democrats generally tougher for most fossil based energy, a bigger concern under Democratic sweep than a Congress where Republicans maintain some leadership. Negative/more extreme impact for the broader sector near term, due to risks on tougher regulation on shale, infrastructure, permitting, carbon pricing, and land access. Another risk is is more assertive demand measurements to encourage low carbon fuels. Natural gas could benefit from greater federal headwinds for coal which could outweigh enhanced competition from wind/solar.
HRC Wins w/Split or Rep Congress: Democrats generally tougher for most fossil based energy, less of a concern in this scenarios than under a Democratic sweep. Negative near term for refiners, due to risks on tougher regulation on shale and infrastructure. Climate change legislation could become part of broader political horse-trading game
Trump Victory: Republicans better from a regulatory perspective but with macro offsets given trade tariffs. Good for refining near term due to (1) potential removal of RINS, (2) lower corporate tax, (3) infrastructure investments would boost diesel. E&Ps: Positive due to less regulation, broader access, and more American isolation. Mixed for natural gas - May meet with less demand growth if Coal is “revived”, but face less intense competition from solar and wind.
Democratic Sweep: Negative overall for the group. Slower economic growth (in the analysts’ view) due to greater regulatory burden would be a negative. Pass through tax status of MLPs likely preserved, a positive. Permitting of infrastructure likely gets more difficult adding an extra year to pipeline projects in some areas, a negative. Would expect renewables to advance to status similar to MLPs with potential pass through in addition to ITCs, mixed
HRC Wins w/Split or Rep Congress: Mildly negative in that recent difficulties in permitting pipeline projects could continue and likelihood of continuing tough regulatory rules, but clearly not as negative as a Democratic sweep
Trump Victory: Mostly positive for the group. Faster economic growth due (inthe analysts’ view) to decreased regulatory burden, a positive. Increased volumes due to greater oil and gas production from declining regulatory burden, a positive. Comprehensive tax reform more likely which could threaten pass through status of MLPs, a negative. Greater risk of trade war which could slow economic growth, a negative.
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