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John Engle
John Engle
Articles (468) 

How to Trade the 2020 Election, Pt. 1

Morgan Stanley has a guide to navigating alternative market scenarios post-2020

December 03, 2019 | About:

The U.S. presidential election is still a year away, but the campaigning has already reached a fever pitch. Many leading Democrats are still in the race for their party’s nomination, and it will be some time yet before we learn who will be tapped to face off against President Donald Trump in the general election.

The 2020 race is already taking shape as one of the bitterest contests in American political history. The victor will have the power to shape the country's public life for years. Thus, whichever party controls the White House will have profound implications for the stock market.

Last month, Morgan Stanley (NYSE:MS) released a guide to trading the 2020 election based on a range of potential outcomes. The investment bank has offered important advice about which sectors and asset types will thrive, and which will struggle, under a Republican or Democrat administration.

Republican president, divided Congress

This can be considered the status quo scenario, in which Congress remains divided between Republicans and Democrats, as it is now, while Trump remains in the White House.

In this scenario, Morgan Stanley recommends buying shares in big banks, U.S. energy companies and telecoms. Bank stocks like Goldman Sachs (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) have done well under Trump thanks to his efforts to roll back many of the additional regulations put in place following the financial crisis of 2008 and the subsequent Great Recession. Likewise, fossil fuel companies have found a sympathetic ear in the White House, certainly compared to the Obama years. Investors can expect further rollbacks of regulations during a second Trump term, while a divided Congress would be able to offer only limited opposition.

Morgan Stanley’s recommendation to sell the U.S. dollar in this scenario also makes a good deal of sense. Trump has railed against the strong dollar and has attempted to exert unheard of levels of influence over the Federal Reserve. If returned to the White House, there can be little doubt that Trump will continue to pursue policies aimed at weakening the currency.

Democrat president, divided Congress

This can be considered the next most likely scenario, as it reflects the smallest change from the status quo. In this scenario, the Democratic nominee (who has yet to be determined) wins the presidency, but fails to transfer their momentum down the ballot, resulting in a still-divided Congress.

Morgan Stanley sees alternative energy stocks and emerging markets as the natural beneficiaries of this scenario. The Democrat Party has made investments in renewable energy a key priority, a fact reflected in the election pledges and manifestos of virtually all candidates for the party’s presidential nomination. While Republican intransigence in the Senate may present some challenges, a Democratic president will likely enjoy sufficient political capital to get their way on a number of points, such as extending tax credits, in addition to acting unilaterally.

The losers in this scenario comprise some of the big winners of the previous one. Big banks and energy companies can expect the free hand extended by the Trump administration to be withdrawn swiftly. Tech and pharmaceutical companies are also on Morgan Stanley’s list of sell recommendations, as many candidates have made these industries’ political influence and price-gouging, respectively, key pieces of their platforms. Candidates like Elizabeth Warren, who has railed against big banks, big pharma and big tech, may present an especially serious threat to these asset classes. Companies such as Facebook Inc. (NASDAQ:FB) and Amazon.com Inc. (NASDAQ:AMZN) could even face the prospect of being broken up on antitrust grounds, were Warren (or one of her fellow travelers) elected. Some of these more extreme actions would likely be stymied by vitriolic Republican opposition, but the threat alone could weigh heavily on securities prices.

Comparing scenarios

This presidential election will have profound effects on the geostrategic and economic future of the U.S. It is still far from clear who will be running in the general election, let alone who will win. However, the likely effects of a Trump or Democratic victory can be understood in broad terms. Another Trump term will almost certainly serve to benefit the same industries that have profited since he took office. A Democratic takeover would undoubtedly put serious pressure on a wide range of companies and industries.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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