Scenarios. Election scenarios. I just wish there were easy ones. Today we are seeing many bets made on outcomes without all that much information. But let me interpret what the buyers and sellers are doing so you know why the market did what it did today and what can happen tomorrow.
First, I see most buyers embracing the concept of gridlock from either the House going Democratic or both the House and Senate changing hands. What does gridlock stand for? It stands for a return to high growth because of what is expected to be a do nothing Congress that blocks anything President Trump wants.
In a do nothing Congress we anniversary the tax cuts that pumped money into the system so that's gone. We get the president processing his tariff war against China. And we get the Fed raising rates once this year and three times next year.
That scenario results in a dramatically slower economy that plays right into the hands of the highest growth stocks, namely the Amazons (AMZN) , Alphabets (GOOGL) and the cloud and cyber security stocks as well as the non-cyclical semis like Broadcom (AVGO) and Qualcomm (QCOM) which are widely regarded to be plays on the secular growth of 5G.
The Democrats have historically liked biotech and not liked big pharma. You could easily buy an ETF for biotech; I like the Spider S&P biotech ETF, the (XBI) . It will do the job. I could easily give you some individual biotechs but this is a group move and I am trying to catch not anything more than that.
What doesn't work? I think the consumer fares not that well. We annualize the tax gift, there's nothing more coming, and we have rates and tariffs going up. There's been a tremendous rally in retail. That could come to a screeching halt. I'd be very careful there. I think that hedge funds would go long Amazon and go short all of the retailers except the discounters like a (TJX) or a Burlington (BURL) or a Dollar General (DG) .
How about if the Republicans keep both houses of Congress? You buy the defense stocks. Northrop Grumman (NOC) , Lockheed Martin (LMT) and Raytheon (RTN) all had OUTSTANDING quarters, among the best we have seen this year. What happened?
The stocks got clocked because of fears that the Democrats would cut 2020 appropriations if they won either house. I expect a roaring bull market to be ignited if the GOP keeps its majority because the Democrats will no longer be able to block an even bigger defense budget in the out years.
I would also unhesitatingly buy the stock of Boeing (BA) even with a trade war waging because, again, I believe that the Chinese need Boeing more than Boeing needs the Chinese as one in every four Boeing planes goes to China because of insatiable demand because of how the middle class likes to travel so much.
I know there are plenty of traders who think that if the Democrats take both houses they will somehow manage to stop Trump from going after China for its multitudinous trading transgressions. I think that the president is incredibly hard to stop and that the Democrats, even if they are in the majority, are not going to be able to say to the president that he can't do what he wants with trade. Many Republicans represent businesses that have been hurt by tariffs and it has meant nothing because you must remember it really isn't about trade anymore it is about regime change. The Trump containment policy, containing the Chinese to their own region of power, isn't going to change no matter what. That's wishful thinking.
Which brings me back to why growth stocks may be the way to go because no matter what, under gridlock the president pushes China, Jay Powell knocks over the consumer and secular growth stocks prevail.
I know there are whole other sectors that some are trying to make work. I see the industrials off all types going higher today. There isn't a scenario I know that includes their rallying. I do know, though, that as I predicted yesterday, oil is really rolling over and at this point that is a huge win for the industrials. There are investors who also feel that if the House and Senate stay Republican than the Chinese government, which may be betting on a weakened president, are going to have to come to the table and make deals.
I don't know about that one. I think it is largely based on hope because as I have said, I do not think the president wants a trade deal. I think he wants the PRC to be a capitalist democratic country that plays fair and believes in human rights for minorities.
That's a stretch because right now China is a communist dictatorship that plays unfair and does not believe in human rights for minorities. I don't think that a House and Senate Democratic or Republican sweep will effect that kind of change, to put it mildly and diplomatically.
How about some winners no matter what? I like the health maintenance slash insurers because they always seem to win no matter what. My favorite is UnitedHealth (UNH) because it pulled out of the Obamacare exchanges and even if the Democrats try to revitalize them there are still losers for most of these insurers. A Democratic sweep and you can buy Humana (HUM) , CVS (CVS) - Aetna (AET) , the former of which had a really good quarter, and Cigna (CI) .
I also like (HCA) no matter what because it is totally ingrained in the fabric of Washington and always wins.
Pathetic but true.
I wish there were more winners. But I keep coming back to the prospect that the president pushes the tariffs to 25% and the Fed pushes up rates four times to overshoot just to be sure we get a lot of layoffs so there's less inflation. They burn down the village to save it if strategy is a time-honored one and I think that Jay Powell right now seems to be tempted to try a little economic arson.
One other thought. If we get gridlock there will be a belief that the economy will stall out immediately and you have to go buy utilities and higher yielding food and beverage companies. There I like (AEP) , Con Ed (ED) and Dominion (D) as well as PepsiCo (PEP) , Procter & Gamble (PG) and Clorox (CLX) , which had the best quarters of the consumer packaged good stocks.
However, you need to be very careful because if Powell keeps raising, these will start falling again. They can't compete on a yield basis.
One last thought. There may be a lot of money that's been waiting on the sidelines for this election to be finished. These are people who regard the darned thing as one big bad event to get through and in that case once it is over it's okay to buy pretty much anything. I would suggest that under that scenario you play in reverse. You take the stocks that I have said do well in a Democratic sweep or even a one-house win and you sell them and sell them hard. You can keep the Republican stocks but don't overstay your welcome because remember, the next big bad events are the G-20 talks at the end of the month where I think no deal will be reached and then the next Fed meeting where we will get a hike and a firm autopilot statement that the punch bowl must be smashed to smithereens.
There you have it. All bases covered. Now for those of you haven't voted, please go and do so and don't vote this stuff just invest in it!