27th September 2016

What impact does presidential policy have on stock markets?

Last night was the first televised debate for the 2016 US Presidential Election – and it was quite a fiery affair.

Among the contentious battlegrounds were issues about jobs and the Iraq war; plus plenty of personal digs about health and finances. Our partners at TD Ameritrade wrote an article earlier this month discussing the role that Presidential policy has had in stock market movements.

Election and stock sectors: possible influence of domestic policies (Originally written by TD Ameritrade on 12th September)

"The buck stops here," said President Harry S. Truman. He was talking about presidential responsibility when things go wrong, but he could also have been referring to the US president’s vast power to help shape domestic policy. And domestic policy can sometimes influence the stock market.

For instance, the healthcare sector has significantly outperformed the S&P 500 index over the last 10 years. Most of the sector’s gains came during President Barack Obama’s time in office, which included implementation of the Affordable Care Act (ACA), a domestic policy better known as "Obamacare" that expanded health insurance.

Digging deeper, health care providers and services, a component of the health care sector that includes hospitals and health maintenance organizations (HMOs), performed especially well during that time.

"These companies have been great beneficiaries of increased enrollment in Obamacare," said Patrick O’Hare, chief market analyst at Briefing.com.

On the other hand, oil and gas sector stocks haven’t really bloomed under Obama, with the sector up just 17% over the last decade. Many factors besides Obama administration policies play into this, including the 2014 collapse in oil prices that hurt profits for many energy firms. But it’s arguable that some of the administration’s policies, like not allowing the Keystone Pipeline, may have added to the pain.

Although every president is unique and predictions don’t always turn out, let’s explore how the next chief executive, based on his or her current policy plans and campaign statements, could theoretically influence the markets with their proposed domestic policy initiatives.

Energy: A Mixed Picture

Some might presume the energy sector could potentially perform better under a Republican president than a Democrat. After all, Republicans have traditionally favored fewer environmental regulations, and one of the party’s mottos in the 2008 election was, "Drill, baby, drill!" Indeed, Republican nominee Donald Trump has said he wants to make industry less subject to regulations, and any pullback on environmental regulations affecting oil and gas companies would conceivably help the sector.

But energy is more than just drilling.

"Clinton has clearly spelled out an affinity for alternative energy in her campaign materials," S&P Capital IQ [New York based financial information provider] wrote in a recent note to investors, referring to Democratic nominee Hillary Clinton. "Among other things, she has announced plans to set a national goal of 500 million solar panels installed during a hypothetical two-term presidency."

Solar energy companies are a component of the energy sector that could benefit from a Clinton win, S&P Capital IQ said.

Financials: Not So Predictable These Days

Traditionally, the Republican Party’s anti-regulatory stance would seem to benefit financial stocks. But over the last 20 years, it’s become harder to predict how politics might affect that sector.

It was President Bill Clinton, a Democrat, who signed legislation that repealed two provisions of the 1933 Glass-Steagall Act, a Democratic initiative that restricted affiliations between banks and securities firms. And now it’s Trump, a Republican, proposing to renew Glass-Steagall, one of the many oddities of this current election cycle. Democrats promise to do the same. Any move to bring back the two provisions repealed by the 1999 legislation could be seen as detrimental to big banks, O’Hare said.

The candidates line up more traditionally on other financial issues, with Trump calling to repeal the Dodd-Frank financial rules and Clinton calling for strong enforcement of those regulations. Dodd-Frank created the Financial Stability Oversight Council (FSOC) to identify risks to financial stability, and under the law, certain very large financial companies became subject to greater Federal Reserve supervision. If Trump were able to loosen some of the Dodd-Frank restrictions on big financial institutions, some banks and insurance companies might conceivably benefit, perhaps helping the financial sector.

Industrials, Health Care, Consumer Discretionary: Which Benefit?

Looking through other sectors, again it’s not so cut-and-dried which would potentially benefit under Trump versus Clinton. For instance, infrastructure spending, traditionally proposed by Democrats, could presumably help the industrial sector, particularly the construction and machinery components. But this year, it’s not just a Democratic initiative. Both candidates propose huge infrastructure programs to help stimulate the economy.

"Infrastructure is in a good spot no matter who wins the election," O’Hare said.

Health care, on the other hand, could move in different directions depending on who’s in office. Republicans have long promised to overturn the ACA, and Trump seems passionate about that issue. Could he and his party actually find a way to do it? A lot depends on the makeup of Congress, because presumably Democrats, even if they lose the White House, might keep enough seats in the House and Senate to prevent Republicans from their goal. Assuming Trump is elected and Republicans do find a way to get rid of ACA, certain parts of the health care sector could end up big losers. "Trump pledged to repeal and replace the ACA on day one, which we view as highly disruptive to the sector, particularly to health care facilities, health care services, and managed health care," S&P Capital IQ analysts wrote.

A Clinton win would conceivably spare those industries, but might pose difficulties for a different subsector of health care: biotech. Some biotech companies have come under fire from Democrats recently for controversial drug price hikes.

"Biotech would probably react positively to Donald Trump because the market thinks Clinton is more in favor of pricing controls on drugs that are extremely expensive," O’Hare said.

Sector performance vs S&P 500
Data and image source: TD Ameritrade.
For illustrative purposes only. Past performance is not a reliable indicator of future results.

Consumer discretionary stocks like restaurants and hotels might come under pressure from either Trump or Clinton, but for different reasons, O’Hare added. Trump wants to get tougher on immigration, which provides a lot of workers for those industries, while Clinton wants to raise the minimum wage, which could cut profits.

The utilities sector could also be affected by the election results, S&P Capital IQ said. A major Environmental Protection Agency (EPA) initiative, the Clean Power Plan, set national limits for power generators on what the EPA deemed to be carbon pollution. The plan is likely to come before the Supreme Court during the next administration. A decision in its favor could impose higher capital expenditures on regulated utility companies.

Right now, the Supreme Court is one justice short, and the next president is likely to make the new appointment. That judge could end up casting the deciding vote on the EPA’s power to enforce the initiative, and a justice appointed by Trump might see the matter quite differently from one appointed by Clinton.

How Can Investors Get Ready for November 8?

All these scenarios are hypothetical, and in the long run, company earnings mean a lot more for stock market performance than anything a new president might do.

If you’re interested in investing in US stocks and investments, find out more on our US and international trading page.

The views are of the author and not those of TD Direct Investing.

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