Trading Opportunities Ahead of the Election

I see a bunch of trading opportunities arise as the broader markets are already factoring in a Clinton victory. However, if they are wrong, which some people say will lead to Nuclear War, (which is laughable) trades I see that are profitable would be similar to the aftermath of Brexit back in June. Before Brexit, the polls suggested the UK would stay in the EU and every panel of experts told them that leaving the EU would be catatonic and the end of the world. The knee jerk reaction from the shock was the US markets dropping 4% for the day, precious metals shooting up, and investors pouring into Treasury’s sending yields lower. This will be the exact same reaction to a Trump victory except we may see larger percentage drops. And then, when the dust settles, this will be a perfect buying opportunity as markets will recover.

Given if Clinton were to win as expected, we will likely see a 2% bump on momentum of the first women President in US history the day after the election. However, after that, I don’t see much fanfare. If we have the scenario of a Democratic president, but the republicans hold on to the House, not only will we continue to see deadlock in Washington, but expect the Republicans to start hearings on trying to impeach the newly appointed president. This will keep the government from accomplishing anything, leaving uncertainty in the markets causing volatility. Any hope for tax reform, immigration reform or any significant legislation besides enacting a duck stamp will be put off for years.  However, aerospace and defense spending will likely increase since Clinton is a warmonger.

If Clinton were to win and the Republicans lose the house, giving the Democrats both houses, we can expect significant left leaning legislation to be enacted. Expect any industry that is highly regulated to be even more regulated. Bank stocks will fall as there will be more talk to break up the big banks. Obamacare will stay in place, however pharmaceutical companies will also see drops as they will reign in drug costs. Alternative energy companies will see a bump while oil and coal companies will be hit with further regulations pushing the industry lower. We will likely see a bump in infrastructure projects will which benefit a slew of companies.  

If Trump were to win, we are in complete unchartered waters as the candidate does not have any prior record on how he’s voted on prior legislation. Based on some of his policies he has talked about, here is some potential outcomes. Trump is planning on cutting corporate taxes but also to repatriate corporate profits at a one-time tax rate of 10 percent that will drive the stock market higher. There is now over $2.5 trillion in cash overseas according to the forecaster Capital Economics. In 2004, the repatriation tax break saw companies use that money to buy back stock and increase their dividend instead of increasing capital expenditures and hiring more people. It’s really hard to believe that another tax holiday would be any different. This in my mind would send the market higher as we would see significantly less shares outstanding across the board. Aerospace and defense spending would also increase under Trump as he says he will "strengthen the military” (whatever that means).

Additionally, if Trump were to win, you could see a shakeup at the Federal Reserve as he would likely replace Janet Yellen. He would potentially appoint somebody who would be more hawkish and inclined to normalize interest rates rather sooner than later. This move would initially strengthen the US Dollar and weaken the price of oil (priced in US Dollars). The savers would probably be a little happier as their bank accounts would potentially gain more interest compared to the miniscule amounts they are getting currently.



This blog represents the view/opinions of the author and not those of his employer.