Winners and Losers of November’s Uncertainty

A lot happened over the past week with the U.S. presidential election and the announcement of a potential COVID-19 vaccine. These occurrences can have similar, contrary, immediate, or lingering effects on different industries to different degrees. Amid all the uncertainty the past month, we believe that highlighting the potential winners and losers of a Biden presidency and a COVID-19 vaccine remain vital in finding opportunities during the current market environment.

The U.S. presidential election has been unique. Despite the Trump administration’s lawsuits on fraudulent ballots, a Biden Administration remains likely. However, the less obvious and the more tangible impact on markets reside in the Senate’s control. According to a study by LPL Financial, the S&P 500 stock index saw its best returns under a Democratic President and a Republican Congress, avoiding a blue wave. Furthermore, the S&P 500 returned 17.2% under a split Congress, 13.4% under a Republican Congress, and 10.7% under a Democratic Congress. Markets prefer checks and balances to hinder drastic changes to the policy that could shift behavioral demand, industry sentiment, and general business operations. With the race for Senate control still undecided, though leaning Republican, the question remains if these checks and balances occur. Gridlock will likely alter President-elect Biden’s tax plan, green energy initiatives, healthcare reform policies, and additional stimulus packages. However, a Democrat-controlled Congress will ease the Biden administration’s path to tax hikes, healthcare reform, green energy initiatives, and additional stimulus packages. It is important to note that a Biden presidency could potentially have notable winners and losers.

Some of the potential winners could be:

Technology, healthcare, cannabis industries, electric vehicle companies, and more specifically, companies like Lyft and Uber, who fought to pass Prop. 22 in California (allowing gig-economy companies to continue to classify their workers as independent contractors to avoid full benefit programs).

Some of the potential losers could be:

Traditional energy industries, the U.S. dollar, consumer discretionary, manufacturing, and industrials.

Potential Outcomes

Source: Catalyst Capital Advisors LLC, 11/12/20

Though a Republican-controlled senate could limit un-revised policy set forth by the Biden administration, one aspect on most Americans’ minds is the potential Biden administration’s tax hike. This tax hike was indirectly proportionate to the Trump administration’s corporate tax cuts in 2017. As seen below, the Financials, Energy, and Consumer Discretionary sectors benefitted the most from corporate tax cuts.

Meanwhile, through a different lens, the same outperformers of corporate tax cuts could potentially be the biggest losers amid corporate tax hikes.

The healthcare and energy sectors’ future performance reside in the control of the senate. Though unlikely, if a Democratic-controlled Senate occurs, intense healthcare reform could whipsaw this sector to adjust to new policy implementation. Meanwhile, green energy initiatives and “green” policies could weigh on the energy sector amid shifts in consumer demands, fewer government accommodations, and increasingly restrictive legislation.

Furthermore, a potential COVID-19 vaccine adds another catalyst that could alter sentiment among sectors. On Monday, a snapshot was displayed with the Pfizer-BioNTech vaccine announcement illustrating confidence that an effective vaccine could deploy in 2021. This announcement prompted near-term investor rotations out of large-capitalization stocks that remained resilient during pandemic uncertainty into smaller-capitalization and value-oriented, cyclical stocks that have been hardest hit with COVID-19 headwinds. Retail companies, movie theaters, hotels, cruise ships, and airlines surged amid the sentiment shift away from conservative, technology driven, and stay at home industries. This market rotation has started to re-calibrate back to the traditional COVID-19 winners subjugated by strong balance sheets rooted in products that benefit from social distancing. However, as we approach a potential COVID-19 vaccine, Monday and Tuesday’s sentiment rotation could have foreshadowed what may be in store for a post-COVID market.

Equity markets, more specifically different market sectors, should be prepared for sentiment shifts and sector outperformer swings amid administration changes and optimistic COVID-19 vaccine developments. Based on the current probability, a Biden presidency and a Republican-controlled Senate seem the most probable. If this is the case, then the sectors hardest hit by tax increases, healthcare reform, and green energy initiatives may be insulated by the revised policy. A revised Biden administration policy could still hurt these sectors, though less extreme than initially expected. Though the presidential outcome and senate control are important, the largest driver for near-term financial markets rests in the development and mass production of a COVID-19 vaccine. With the economy improving despite increased chances of a second wave of Coronavirus cases, a successfully produced vaccine remains vital for a sustained economic rebound and a return to industry normalcy (despite the technology dependence likely to linger post-COVID-19). A return to industry normalcy could weigh on the performance of the high-flying, COVID-resistant stocks that have soared throughout the majority of 2020. All in all, understanding the impact of an administration shift is important; however, the real market mover unfortunately still resides in the uncertainty of COVID-19 dominating 2020.