2016 Elections – March Toward Unity

In this Special Election report, we consider the possible investment implications across 10 equity-market sectors.

May 25, 2016

Paul Christopher, CFA®, Head Global Market Strategist
Craig Holke, CFA®, Global Research Analyst

  • Between now and summer’s end, party leadership teams will work toward uniting their various factions around their nominee.
  • Campaign-trail statements by the presumptive presidential nominees are beginning to suggest some possible investment implications

What it may mean for investors

  • Future policy and market direction may depend less on campaign promises than on how well the candidates unify their parties and voters behind them.

The party primaries have produced presumptive nominees, and the parties are shifting to a general election focus. Between now and the end of the summer, party leadership teams will work toward uniting their various factions around their nominee. In this Special Election report (our third election implications update), we consider the possible investment implications across 10 equity-market sectors.

Keep Perspective on the Campaign

First, for context, we present the timeline of important events leading up to the seating of the next government in January 2017. (Note that after the elections, considerable positioning may still occur before the new government begins work in January 2017.)

Important election datesSource: Wells Fargo Investment Institute, 5/20/16.

At this point in the presidential election campaign, we see several reasons to be cautious about expected election results:

  • Both parties still have significant work ahead in order to unite their various factions.

    A wide ideological gap separates the presumptive Republican nominee and other Republican leaders. On the other side, Senator Sanders has a vanishingly small chance to deny Secretary Clinton the nomination, but he and his contingent at the convention will try to influence the party platform and the party’s expected pivot toward the center for a general election.

  • Open elections can be close.

    In the nine open presidential elections starting with the 1948 poll, the winner had less than a five-point popular vote margin in five contests.1 So far, many voters seem to have strong negative perceptions of each candidate, suggesting that this race also could be close.

  • Be careful about inferring legislative and policy changes from campaign promises.

    Previous research over presidents from Woodrow Wilson to Jimmy Carter indicates that an average of 75 percent of campaign promises were kept during a president’s first term, but the table below shows presidential promise-keeping has declined.2 It may be that in the volatile political environment, today’s candidates promise more—and more than can be achieved—than in the past.

    Equally important, congressional impasse could delay or block many presidential initiatives. Recent elections have been politically volatile, as voters twice have removed the majority party in each chamber of Congress since 2006. Yet, so far in the primary season only one incumbent House member or senator has lost a primary election.3 The Democrats are unlikely to capture the House, but appear to have a better chance to retake the Senate. Divided government could continue.

Table 1. Campaign Promises Kept Have Declined

First Term
Year President Kept Broken
1992 Clinton* 66% 31%
2000 Bush** 46% 23%
2008 Obama*** 47% 23%

Source: Listed in table footnotes, and Wells Fargo Investment Institute, 5/20/16.
* "A look at where Clinton stands on 160 campaign promises", August 12, 1996, https://www.highbeam.com/doc/1G1-18574254.html
** "Bush fulfilled about 46 percent of campaign 2000 promises, analysis shows", January 17, 2004, https://www.highbeam.com/doc/1G1-112286294.html. Note: The source indicates that Congress “killed or stalled at least 25 percent of Bush’s commitments.”
*** "A PolitiFact special report: Obama's first-term campaign promises", January 20, 2012, http://www.politifact.com/truth-o-meter/article/2013/jan/17/politifact-obamas-first-term-campaign-promises/.
Note: The sum of kept and broken promises does not add to 100 percent, because some promises were considered in progress—- neither kept nor broken—at the end of the first term.

Possible Favored Industries, Based Solely on Presidential Election Outcomes

We next examine campaign issues for the potentially different impacts between the two parties. In each case, we offer our perspective on relative preferences within each equity-market sector.

Health Care

Defining Policy Issues: Affordable Care Act (ACA), Prescription Prices

  • Republicans want to repeal, but Democrats support the ACA and its individual and employer mandates.
  • Republicans favor negotiating drug price inflation rates; Democrats want to regulate prices, a more aggressive approach. Watch a California ballot initiative, California Drug Price Relief Act, which would limit the rate of state drug funding. If successful, this initiative could spread to other states.

Our Perspective

  • If Republicans control Congress and the White House, investors probably will price in some chance of repealing the ACA and its mandates, which could be negative for managed care and hospitals.
  • Some limit on prescription drug price inflation seems likely, but should be tougher under Democrats.
If Republicans Win If Democrats Win
Favorable: Pharmaceuticals Favorable: Managed care and hospitals
Less Favorable: Managed care and hospitals Less Favorable: Pharmaceuticals

Consumer Discretionary

Defining Policy Issues: Immigration and Tax Policy, Housing Finance Policy

  • Democrats favor taxing the highest incomes, and Republicans favor broad tax-rate cuts. Also, Democrats propose to tax Internet sales to increase state and federal revenue.
  • Republicans support tougher immigration standards, and some leaders advocate deportation, which could reduce low-skilled labor supply and potentially hurt hospitality industries.
  • Democrats support government-sponsored housing finance. Republicans favor private finance, which has been slow to bounce back from the housing crisis. If Republicans win, greater reliance on private housing finance could slow the housing recovery and home-improvement companies.

Our Perspective

The eventual policy solutions could take a year or longer and embody significantly more compromise than either presumptive nominee now expresses.

If Republicans Win If Democrats Win
Favorable: Luxury goods Favorable: Off-price retailers, home improvement
Less Favorable: Hotels and restaurants, home improvement Less Favorable: Luxury goods

Consumer Staples

Defining Policy Issues: Immigration and Trade

  • Republican efforts to deport and reduce immigration could limit labor supply for agriculture. The Democrats’ immigration policies should be more positive for labor supply.
  • Failure to pass the Trans-Pacific Partnership trade agreement likely would hurt U.S. multinational firms.

Our Perspective

We believe that Congress will avoid large-scale deportation, and will pass the Trans-Pacific Partnership after further delay. We doubt that a wall along the U.S.-Mexican border is feasible or will be effective.

If Republicans Win If Democrats Win
Favorable: Domestic producers with domestic supply chains and low reliance on unskilled labor Favorable: Domestic producers with domestic supply chains
Less Favorable: Multinational food, beverage, personal care and tobacco; domestic firms that rely on unskilled labor Less Favorable: Multinational food, beverage, personal care and tobacco


Defining Policy Issues: Fiscal Policy, Trade Policy, Energy Policy

  • Both parties support new infrastructure, but Republicans emphasize roads, ports and bridges, while Democrats favor public transportation and roads. Both favor modest additional defense spending.
  • Foreign countries’ retaliation for U.S. free-trade opposition would be notable in auto exports.
  • Democrats favor reducing reliance on fossil fuels, which potentially hurts the rail industries that carry oil.
  • Republicans support more merger activity, which we believe could help the airlines.

Our Perspective

Aside from infrastructure and defense spending, the two parties differ widely. Outcomes will depend on the degree of gridlock in Congress.

If Republicans Win If Democrats Win
Favorable: Defense, construction, airlines Favorable: Defense, construction
Less Favorable: Automobiles Less Favorable: Railroads, automobiles


Defining Policy Issue: Energy Policy

Republicans favor fossil fuels, including coal, and want to relax carbon-emission limits. Democrats prefer renewable energy, want low emissions, and some leaders support Renewable Fuel Standard mandates.

Our Perspective

No single party is likely to get all it wants on energy policy, which could imply that no clear policy will continue. Market supply and demand factors likely will be the primary market movers in the coming years.

If Republicans Win If Democrats Win
Favorable: Fossil fuels Favorable: Renewable energy
Less Favorable: Renewable energy Less Favorable: Fossil fuels


Defining Policy Issues: Mining Policy, Housing Finance Policy, Infrastructure

  • Democrats oppose mining on federal lands, do not support offshore drilling, and would expand mining regulation. Republicans generally take opposite positions. Both parties would renovate infrastructure.
  • On housing, government-backed funding has momentum and is supporting the housing recovery, to a more immediate benefit of building materials. Republican-supported private-backed home funding is recovering more slowly from 2008, and this is less favorable for materials.

Our Perspective

Inter-party differences probably will delay or block a consensus to ease mining regulation or to change housing finance policy.

If Republicans Win If Democrats Win
Favorable: Miners, infrastructure and construction-related materials (e.g., lumber, steel) Favorable: Housing-related materials, infrastructure and construction-related materials (e.g., lumber, steel)
Less Favorable: Housing-related materials Less Favorable: Mining

Information Technology

Defining Policy Issues: Trade, Tax Reform, Immigration

  • Opposition to free trade favors domestic companies that are less affected by new tariffs and international retaliation against U.S. trade protection.
  • Lower corporate tax rates and revenue repatriation could encourage higher valuations, especially for companies with overseas cash. Republicans support these policies more aggressively than Democrats.
  • Democrats offer a more open immigration policy, specifically to increase the issue of H- 1B visas4 for skilled workers, though Democrats also oppose outsourcing to India.

Our Perspective

We foresee a challenging path to a legislative consensus on corporate tax reform. Also, repatriation seems important for the (typically large) firms with significant overseas cash, but investors should be cautious. For historical perspective, the 2004-2005 repatriation holiday encouraged investors to invest in companies with overseas holdings. Ultimately, however, the holiday was disappointing. Only a modest amount was repatriated and was not always used to increase efficiency and shareholder value.

If Republicans Win If Democrats Win
Favorable: Companies with large overseas cash; domestically-oriented companies Favorable: Companies looking to grow via immigrant engineers (e.g., social media and mobile advertising); domestically-oriented companies
Less Favorable: Companies looking to grow via immigrant engineers (e.g., social media and mobile advertising) Less Favorable: Companies with large overseas cash; companies that outsource to India


Defining Policy Issue: Regulation

  • Democrats could apply Dodd-Frank regulatory guidelines across the banking industry, but Republicans could try to ease regulations for regional banks. Regulatory easing for money-center banks seems unlikely from either party.
  • Democrats have proposed a financial transaction tax and regulatory proposals for shadow banking5 and high-frequency trading6 —both negatives for nonbank financial companies. Financial regulation appears to be less of a priority for the Republicans.
  • Democrats support government-sponsored enterprises for housing finance, but Republicans do not.

Our Perspective

The regulatory environment is unlikely to ease during an election year, and key appointments at the Federal Reserve, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau and Office of the Comptroller of the Currency are not open until 2018-2019. Unless they control the White House and Congress, it could be more difficult for Republicans to reverse many of the new rules related to bank and nonbank financial regulation. Likewise, without full control, Democrats probably lack enough push to deepen regulation.

If Republicans Win If Democrats Win
Favorable: Regional and commercial banks Favorable: Government-sponsored enterprises
Less Favorable: Government-sponsored enterprises, money center banks Less Favorable: Nonbank financial companies, money center banks

Telecom Services

Defining Policy Issues: Regulation

  • Democrats favor regulating the Internet over traditional telecom and cable systems and have imposed new Federal Communications Commission (FCC) rules to favor content over delivery (i.e., regarding Net Neutrality and cable set-top boxes).
  • Republicans seek to reverse recent FCC rulings, to impose more restrictive libel laws, and favor accelerated depreciation rules that benefit telecom companies.

Our Perspective

Short of controlling the White House and both houses of Congress, neither party seems likely to significantly change the regulatory regime.

If Republicans Win If Democrats Win
Favorable: Telecom Services and cable Favorable: Media
Less Favorable: Media Less Favorable: Telecom Services and cable


Defining Policy Issues: Energy Regulation and Tax Reform

Democrats have erected significant regulatory hurdles for coal and for coal-fueled utilities in order to benefit renewable energy sources, but Republicans want to roll back anti-coal regulations and Environmental Protection Agency (EPA) climate-change regulations, in favor of oil, gas, and coal.

Our Perspective

Gridlock: Controlling the White House is especially important for directing the EPA’s regulatory approach. However, a veto-proof congressional mandate is also key for pushing an agenda beyond existing statutes. That sort of control seems beyond the realistic hope of either party at present.

If Republicans Win If Democrats Win
Favorable: Coal-based utilities Favorable: Non-coal utilities
Less Favorable: Non-coal utilities Less Favorable: Coal-based utilities

Four Open Questions for Investors to Watch

In a Congress that may split between Republican leadership (in the House) and Democratic control (in the Senate)—or one which may remain Republican-led in both houses but without a veto-proof majority—there is a strong probability of continued impasse on many questions. It is not even clear that a Republican president can consistently marshal Republican support. The party that unifies itself most quickly and effectively may have the best chance to capture independent voters. After the elections, the more unity between the new Congress and the new president, the more investors may anticipate policies and, therefore, election implications for the financial markets. Consequently, the four factors that we believe are most important to monitor between now and January 2017 are mainly about the prospect for unity:

  • How completely does each party unite before its summer convention?
  • Ideological differences are on display among the leaders of each party. Yet, it has been typical for candidates to stake out more extreme views in the primary season but to moderate in the general election campaign. If the personal attacks persist into the conventions, we believe that the unification process and possibly the post-election collaboration could be very difficult.

  • How does each nominee promote unity with his or her choice of a running mate?
  • The vice presidential candidate typically balances the ticket for the party and voters, but also is someone to run interference with Congress. Every vice presidential running mate since 1940 has been a sitting or former vice president, senator, governor, representative, or high executive office holder. The pick may balance the ticket in any number of ways: geography (e.g., someone from a contested state), ideologically (a pragmatist to match an ideologue), or age (someone younger with someone older). Investors should consider whether each eventual pick balances the ticket (a good sign for unity) or reinforces too much one or another feature of the presidential candidate.

  • How do polls on Senate races change with polls on the presidential race?
  • The Senate seems closer to a majority change than the House. Watch the polls: The more that Democratic Senate candidates strengthen in their polls as Secretary Clinton strengthens in hers, the more sensitive the Senate majority may be to the presidential race.

  • How big is voter turnout?
  • The Senate seems closer to a majority change than the House. Watch the polls: The more that Democratic Senate candidates strengthen in their polls as Secretary Clinton strengthens in hers, the more sensitive the Senate majority may be to the presidential race.

We expect a lot to happen this summer and, as we inch closer to the elections, the financial markets will be paying ever closer attention to political developments. Election rhetoric may become more contentious, and we recommend using our four factors as a way to keep perspective amid media headlines and opinions. We will return to reassess the investment implications after the conventions and plan to continue our series through year-end.

1 We consider 1948 and 1976 open elections, because Presidents Truman and Ford were completing their predecessors’ term in those years. Popular vote is used, in this case, as a measure of popular attitudes. Of course, the Electoral College process determines the winner.
2 See “A PolitiFact special report: Obama's first-term campaign promises”, http://www.politifact.com/truth-o-meter/article/2013/jan/17/politifact-obamas-first-term-campaign-promises/.
3 Evercore ISI, “U.S. Election Special—Trump v Clinton: The Economy and Markets”, May 9, 2016. The one Congressman who lost is Rep. Chaka Fattah (D-PA), who is facing corruption charges. See http://www.npr.org/2016/04/23/475388713/corruption-charges-could-cost-congressman-chaka-fattah-12th-term.
4 H-1B visas are non-immigrant visas that allow employers to temporarily employ foreign workers with specialized fields of knowledge.
5 The shadow banking system is a term for the collection of nonbank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.
6 High-frequency trading is a program trading platform that uses algorithms and powerful computers to analyze markets and execute trades based on market conditions at very rapid speeds.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. Wells Fargo Investment Institute is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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