Sector Spotlight: Potential Winners and Losers

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The stock market volatility happening in an election year boils down to how sector industries are affected by the policies proposed by the candidates. This year, we have two main contenders, Donald Trump and Joe Biden, whose statements related to sectors like energy, manufacturing, finance, and more have been circulating online.

Given how influential their statements are, these sectors can be significantly affected, both positively and negatively. This leads to higher dispersion in stock returns, as the gap between the winners and losers widens.

For the time being, it may be unfeasible to predict the winners and losers. However, assessing past patterns and understanding the drivers of sector performance remains crucial for an investor like you. Having this knowledge can further help you make more informed decisions and capitalise on the dispersion.

This article will provide insights into the historical performance of sectors during election years under both Democratic and Republican administrations, and the factors influencing these performances.

Sector Performance Throughout The Years

The S&P 500 recorded sector dispersions under both the Democratic and Republican administrations from 1990 – 2023. The graphic shows how 11 main sectors have performed, including year total returns, maximum, and minimum returns.

Image source: JP Morgan

At a glance, sectors are seen to be performing better under the Democratic administration. The returns, as assessed by the maximum, minimum, and average returns, are higher than those yielded under the Republican administration.

Most sectors under the Democratic administration are also showing greater dispersions. This means that it is easier for investors to capitalise on the gap between the winners and losers by picking the right stocks with higher potential returns while avoiding underperformers.

But you should not be making premature decisions solely from these findings. The data provided cannot guarantee that a Democratic administration will always result in better performance.

Avoid speculating on the preferred outcomes that benefit your investment portfolios. It is necessary to consider the factors that contribute to market performance as well as the broader economic landscape and potential policy changes in the future.

Key Factors Influencing Sector Performance

Sector performance is a multifaceted matter. Layers of factors that are beyond political affiliation may influence how certain industries yield returns post-election. These include:

Economic Conditions

Economic conditions play a major part in determining how sectors perform. While the Democratic administration showed more favourable performance from 1990 to 2023, the economic crisis that hit in 2008 when Obama took office was not tied to political affiliation alone.

Several sectors were heavily affected. What once were booming industries like real estate and finance faced significant downfall. The crisis lasted for 18 months before it was officially over in June 2009, and recovery was slow, with median household incomes not fully recovering until 2016.

By this, as an investor, you must be prepared for all possibilities that may occur. The economy influences sector performance through long-term factors like inflation and interest rates more than short-term events like elections.

Market Sentiment

Market sentiments are particularly volatile during an election year. The uncertainties that this event brings make selling investment portfolios seem like a more reassuring option than holding on through the unsettling fluctuations.

The statements made by the candidates further add to the tensions. There are times when markets may react positively to a candidate’s proposals related to certain sectors, while the future performance remains uncertain.

Image source: CAP20

The energy sector, for example, may react positively after the announcement stating that Biden’s administration has taken climate action. However, this may not be the case as his rival released opposing arguments that could potentially influence market sentiment.

Image source: Politico

This explains why investors must navigate election-year volatility with caution and consider a diversified approach to mitigate risks associated with short-term political volatility. 

Geopolitical Relations 

Being a debtor nation, the U.S. has been proactively strategising on reducing the trade deficit. One significant move is to encourage domestic manufacturers to increase production, aiming to reduce reliance on imported goods. 

However, both presidential contenders are proposing tariffs on imported goods, which presents a challenge. While the idea is to bolster domestic production, many manufacturers that depend on imported raw materials are at risk. 

Manufacturers that import aluminium from China, for instance, have been severely hurt by the tariff spike the U.S. government put on Chinese goods. This policy, first imposed under Trump’s administration, is likely to keep escalating if the Republican nominee takes office.

Image source: BBC

His opponent, Biden also has planned to raise tariffs on Chinese EVs, solar panels, batteries, and more goods. Fair to say that due to the aggressive rise from 25% to 100% for EVs, 25% to 50% for solar panels, and 25% to 50% for batteries, his policy will put heavier strains on the already deteriorating U.S.-China trade relations.

Image source: CNBC

What investors should expect is that these heightened tariffs will lead to increased costs for manufacturers, potential supply chain disruptions, and higher prices for consumers. Subsequently, shares of the manufacturing sector are expected to be volatile and potentially experience a decline, either in the short or long term.

Tax Plans

Tax plans outline how the U.S. government will generate revenue to fund nationwide public services, infrastructure, and other priorities. This year’s main contenders, Biden and Trump, stand on opposite sides regarding the taxation approach.

Biden’s strategy on taxation focuses on these aspects:

  • Increase tax rates on corporate, individual, and capital gains income
  • Expand tax credits for workers and families
  • Expand tax bases to include more types of income

Meanwhile, Trump takes on a different taxation approach, including:

  • Propose individual and estate tax cuts permanent
  • Maintain the 21% corporate income tax rate
  • Tax large private university endowments

These differing tax strategies have opposing effects on sector performance and imply distinct outcomes for investment portfolios. How?

Higher corporate income tax may stagnate sector growth, potentially affecting dividend payouts as well. On the other hand, tax cuts could stimulate sector growth, likely leading to higher stock prices.

How Does Sector Performance Affect The Stock Market?

The stock markets are linked to sector performance. The stronger the sector performance is, the more likely the prices will move positively. Why?

Stronger sector performance implies higher profits earned by the sector industries, which will be paid by dividends to shareholders. Among other factors, this can be due to beneficial macro and microeconomic policies proposed by the elected candidate.

For the time being, we cannot predict who will win the contest. Thus, the market remains full of speculation and market sentiments are still highly volatile. However, the uncertainties are likely to subside after the election outcome is announced.

Should You Wait Until The Election Outcome is Announced?

Considering the volatile market sentiment due to uncertainties of future U.S. sector performance, investing in an election year comes with its challenges. Many investors are urged to sell their portfolios as the perceived risks seem to be too significant to tolerate.

While waiting until the election outcome is announced may provide a greater sense of security, you may lose the chance to earn capital gains on the right sectors when the stock prices are still low. 

However, entering the market earlier, or before the winning candidate is declared, requires thorough research and a keen eye on the latest news that may impact how industry sectors in the near future.

By this, the decision is entirely yours to make. Make sure to balance the potential for higher returns against the uncertainties and risks associated with an election year.

Final Thoughts

Looking at the past patterns, sector performance dispersions were higher under the Democratic administration. And higher dispersions translate to greater gaps in sector performance outcomes, facilitating investors to strategically strategies on stock picking more precisely.

However, the reigning administration is not the only factor that counts. Sector performance is determined by other layers of factors such as economic condition, market sentiment, trade relations, and tax plans.

As an investor, these are crucial aspects to monitor, as neither Democratic nor Republican administrations alone dictate sector performance growth. The policies proposed by each candidate introduce both opportunities and risks to the industrial sector, serving as benchmarks for evaluating potential outcomes.

You can effectively navigate these dynamics and capitalise on the opportunities. Understanding these changes is important for investors looking to stay ahead in today’s dynamic market and capitalise on emerging opportunities. 

At UOB Kay Hian, we can help investors stay informed about the latest political developments and their impacts on market trends. Stay ahead of the curve and leverage our expertise to make smarter investment choices.


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