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U.S. Election Guide to Markets: What to Watch as Results Come In

  • Bonds rally, equities fall if Trump wins or Democrats sweep
  • Fiscal stimulus likely, bullish for stocks, bearish for debt

With the most unconventional election in modern American history drawing to a close, the global financial markets are betting on more of the same -- a Democrat in the White House kept in check by Republicans in Congress. Given all of the October surprises, investors may be ill-prepared for another on Nov. 8.

Renewed controversy over Hillary Clinton’s e-mails “is not likely to cause a fundamental shift in the presidential race,” analysts at Evercore ISI said in a report dated Oct. 30. The biggest shock would be a victory by Republican Donald Trump or a sweep by the Democrats. Either could send investors running for cover into the safest government bonds, U.S. dollars and the yen and fleeing from riskier equities and emerging markets, much like the aftermath of the U.K.’s June vote to leave the European Union. Beyond that, both candidates want to increase spending and cut taxes which would be bullish for stocks and bearish for fixed income.

Below is a look at potential winners and losers depending on who wins and loses. But first, a caveat. Investors’ immediate reaction to U.S. elections often doesn’t last, as shown by this chart:

With that...

Stocks

Clinton Wins: “The market has already priced in a Clinton victory,” Margaret Yang, a CMC Markets analyst in Singapore, said by phone. “Any upside will be limited if she wins.”

The biggest losers would be finance and drug companies.

“A potential Democratic sweep would represent one of the toughest election outcomes for banks,” Morgan Stanley Research said in a report, citing the possibility of tougher rules and tax changes that might hurt companies like Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Moves against carried-interest rules that benefit asset managers, also targeted by Trump, would hurt firms including Janus Capital Group Inc. and Waddell & Reed Financial Inc.

Under Clinton, pharmaceutical and biotech stocks “could be hit by renewed pressure to curb price increases on drugs,” BlackRock Inc. researchers said in a report, noting her complaints about rising prices. Citigroup Inc. cut its rating on the European health-care industry to underweight in September, citing risks related to the election. Drugmakers Novo Nordisk A/S and Roche Holding AG have trailed the broader market this year as Clinton’s prospects rose, with the shares gaining only during times when her polling numbers fell.

Hospital operators and Medicaid providers such as HCA Holdings Inc. and Universal Health Services Inc. may benefit from continued Affordable Care Act subsidies, according to analysts from Strategas Research Partners, LPL Financial Holdings Inc. and Credit Suisse Group AG.

Her plans to reduce dependence on fossil fuels would boost alternative energy producers, with Morgan Stanley touting the prospects of Sunrun Inc. and NextEra Energy Inc. with the Democrat in the White House. Strategas also likes First Solar Inc. under Clinton. Evercore’s report adds General Electric Co., Tesla Motors Inc., SolarCity Corp. and Exelon Corp. to the list.

Trump Wins: “Valuations of U.S. equities are quite high, and a Trump victory will trigger a massive selloff,” CMC’s Yang said. Many would consider that a classic “black swan event,” she added, so the reaction would be “much more severe” than Brexit, which caused the S&P 500 Index to fall 5.3 percent in two days as benchmarks in Europe and elsewhere lost even more. Investors seeking haven in the yen would be “a negative for Japanese exporters,” Yang said.

The Republican’s shifting policy positions make his longer-term impact on particular sectors harder to assess. BlackRock’s analysis of the correlation between the two candidate’s polling numbers and sector stock performance suggest drugmakers, insurers and banks are expected to do better under Trump.

Though finance companies may prefer Trump, BlackRock warned that repealing the post-crisis Dodd-Frank law, derided by the industry’s Republican allies, may result in “simpler and blunter but equally onerous rules.” Almost all sectors of the health care...


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