This commentary originally appeared on Real Money Pro on Feb. 25 and Feb. 26. Click here to learn about this dynamic market information service for active traders.
Equity investors have a litany of items on their "worry list" these days. The Chinese market just re-opened after the Lunar Day holiday and promptly plunged more than 6% overnight. The G20 is sounding increasingly desperate and calling for a coordinated global effort to boost worldwide demand before their upcoming summit.
The Japanese and European Central Banks are experimenting with negative interest rate policies -- with mixed results, so far. Brazil's debt seems to get downgraded almost on a weekly basis and is now squarely in junk territory. It is hard to see how commodity-dependent emerging markets, like Russia and Brazil, can avoid default if commodity and oil prices stay at these levels through 2017.
Things domestically are a bit better, although January's new-home sales figure was a bit disheartening. We also have a presidential election coming up. It appears it will be a nasty contest, given the two candidates with the biggest negative ratings are currently leading their respective nomination races. This can't be good for the markets going forward.
On one side, you have Hillary Clinton -- who the majority of the American public, including a good number of Democrats, according to recent polls, don't judge to be generally "trustworthy." On the other side, you have Donald Trump -- whose popularity with Republican party leadership is questionable, at best; and whose potential candidacy has led a significant number of Republican voters to state in recent polls that they will not vote for him if he is the party's standard bearer.
More important to the market, both of these candidates are prone to populist rants. The Donald made comments recently calling for a boycott of Apple (AAPL) until it agrees to unlock an iPhone for the FBI in connection to the recent San Bernardino shootings. And any biotech investor knows how unhelpful Clinton's tweets about drug price "gouging" were on the sector, which is in biggest bear market since the end of the financial crisis.
If this is the match-up in the upcoming presidential election, it is hard to see how it will not turn out to be one of the nastiest campaigns in recent memory. Given the polarization of feelings around both potential nominees, it is also hard to not think there will be huge counter backlash against the winner in the 2018 mid-term elections. This is hardly the continuity and certainty markets tend to prosper within.
If that wasn't enough, we have months of contentious fighting about who should fill the open seat on the Supreme Court: the current resident of the White House or the next President. This virtually ensures months of histrionics from both sides. We will not even get into the fight the President's current push to close Gitmo is about to trigger.
I know it is not polite to discuss politics in mixed company. However, given the political events on the horizon, an investor has to be aware of the unfolding political environment and its potential to be a headwind for the stock market throughout 2016.
I will not even begin to speculate on how the election turns out and which party wins the White House. However, I believe some stocks offer good value and should do well regardless of who we are calling president next year and which party controls the Senate.
Let's start with biotech. The sector is in its biggest bear market since the financial crisis, down some 40% from its peaks in July. Valuations had gotten ahead of themselves prior to this decline, but political rhetoric about drug price "gouging" has also been an overhang. Some "bad actors" might continue to find themselves under scrutiny before and even after the election. However, it is hard to see significant legislative changes given the most likely outcome of the upcoming election is the same dysfunctional and divided government that's been in place for years.
The small-caps have been particularly hard hit, even names like Relypsa (RLYP), with its recently approved drug Veltassa that should be a half-billion dollar or better blockbuster in a few years. Raising funds through secondary or debt offerings has just dried up, severely hurting valuations for smaller concerns.
This has put some of the larger players in the catbird's seat as far as making accretive acquisitions. These large-cap concerns are also trading at their cheapest valuations in at least five years. Amgen (AMGN), Gilead Sciences (GILD) and AbbVie (ABBV) are all great combinations of growth, value and yield.
Gilead is basically buying itself back with its massive cash flow, recently removing more than 1% of its outstanding float per month on average. I also expect this biotech juggernaut to make a few small acquisitions at dirt cheap prices this year.
Infrastructure stocks should also fare well after the election provided we avoid going into a recession. This one of the few areas that both political parties agree needs to be addressed.
The housing market continues to improve, in my view, as we have had now had nearly a decade of annual housing starts being significantly under their long-term averages, which should equate to years of long-term pent up demand. Both parties are pro home-ownership.
Myriad homebuilders look well positioned and many are down 30% to 40% from their highs this summer. United Rentals (URI) has been beaten down over last year but should do better if either of the most likely scenarios transpire. It is the largest play in a very fragmented industry and will likely use the current weakness to continue to build on its roughly 12% market share.
Finally, gun control should be a significant focus of the campaign. And this should spike gun and ammo sales. This will be good for sporting goods stores, such as Big 5 Sporting Goods (BGFV), and gun makers such as Smith & Wesson (SWHC). These could be good momentum trades, although I doubt much changes after the election for this industry.
Politics will be a very ugly sideshow over the coming quarters, so investors might as well position themselves for when all the histrionics subside by the end of the year.