Don’t Sweat the U.S. Election

Debates, commentary and tweets from this season’s unlikely pair of U.S. presidential candidates have been causing big swings in the U.S. markets. Meanwhile, the wild ride in Deutche Bank shares has been swaying markets on the other side of the Atlantic here as investors ponder whether Germany’s largest financial institution is too big to fail. While basically solvent at the moment, the U.S. government recently slapped DB with a massive politically-motivated fine which some believe could push the bank to the brink of collapse. Investors are awaiting a possible settlement with the U.S. Department of Justice less one month before America’s election and less than twelve months before German president, Angela Merkel comes up for her reelection. Politics are front and center but investors should not be tempted to overreact.

Election season is, of course, the time of year when investment strategists bring out the historical charts of whether the stock market does better or worse under a Democrat or a Republican president. Then there is the question of whether the Senate and Congress are controlled by the same party and if that helps or hurts. Personally, I do not believe that such historical studies are particularly relevant this time around. For one thing, these candidates are the most disliked and distrusted party leaders to have ever run for America’s highest office (according to independent surveys). Meanwhile, the U.S. is experiencing the poorest post-recession recovery in the country’s history while being propped up by unprecedented levels of money-printing and artificially low interest rates. These are not exactly normal times. Historical studies are interesting to contemplate but each business cycle is different.

Noted economist John Mauldin likes to say the struggle for economic growth is always between innovation which creates wealth versus governments and central banks which destroy it. One recent example is Apple Inc. which has grown over the past two decades to become the largest publically traded company in the world by developing innovative computing products while creating millions of jobs along the way. Apple’s latest series of market-leading smart phones helped pioneer an innovative glide path for the bourgeoning mobile internet. Then last month the European Union hit Apple with an unexpected tax bill of $14.5 billion, because they can. Or at least they think they can. Interestingly, the ruling is on appeal by the government of Ireland, Apple’s European domicile, which actually does not want the tax money. Ireland has been trying to keep corporate tax rates down in order to encourage direct foreign investment – a strategy that has been working. At least one country gets it.

Looking at the two U.S. candidates, we see more examples of wealth destruction policies. Mrs. Clinton has announced she will ‘go after’ the drug companies through price controls, ‘go after’ wealthy people with higher taxes and ‘go after’ the banks with more regulations. Apparently the only thing she won’t go after is the smothering $20 trillion Federal debt load and the reckless government spending which caused it. Choking debt, barely a footnote in this election, has been the main source of anemic growth and stagnant incomes, a fact confirmed by many studies, including this month’s report from the International Monetary Fund (IMF). Meanwhile, the Donald’s plan is less clear. Although he has a good point on lowering America’s corporate tax rate, currently the highest among the developed world countries, many believe his protectionist views on trade also have the potential to destroy wealth.

Despite the elevated political noise, investors can still profit by using market swings to their advantage. Importantly, the American political system is constitutionally constructed with a series of checks and balances. Legislation must be voted on by both the House of Representatives and the Senate with the President having the right to veto. Besides the President, America has another 535 voting members in Washington. Weak hands selling assets purely on the basis of America’s presidency may provide opportunities.

Politicians typically talk extremes in order set themselves apart during election season, but actually passing much of this legislation is whole different story. For example, Mr. Obama spent a record $1.5 billion on political advertising to conjure a vision of ‘hope and change.’ The clever campaign was enough to get him elected twice, but in the end nothing much happened. In the case of the Obama presidency, the stock market actually did fairly well as Congress was able to neutralize some of the most destructive proposed legislation while the Fed kept the pedal to the metal on monetary policy. Medical students are taught ‘primum non nocere’, or ‘first, do no harm’. As a rule of thumb, this is usually the best outcome from government, too.

Healthcare and Financial stocks, this year’s two worst performing industries, offer compelling opportunities for longer term investors. Both sectors have been beaten down by political banter. As mentioned above, the banking sector continues to face major fines related to the credit crisis seven years ago. Governments in the U.S. and Europe have been using large financial institutions as sovereign ‘piggy banks’ of sorts, slapping the largest ones with the biggest fines. However, with loan growth beginning to pick up, the real estate market edging forward and interest rates likely seeing an increase (at least in the U.S.), the financial sector has good potential from these depressed valuations. The government fines are large but they are finite and the better managed banks have recently been allowed to begin returning cash to shareholders.

Not surprisingly, healthcare is once again being kicked around like a political football. Late last year, a negative tweet from Mrs. Clinton was enough to knock billions of dollars in market value off the group. Political rhetoric about the high cost of healthcare is louder than ever, but the positive long term fundamentals of an ageing population should ultimately supersede the inevitable Washington meddling.

Meanwhile, exceptional levels of innovation are occurring in healthcare, particularly in the areas of oncology and immunology. Therapeutic drugs are now reaching the market in less than half the time required a decade ago and companies are becoming more productive. At the same time, merger and acquisition activity has been robust with the major pharmaceutical companies leveraging their vast distribution systems by snapping up smaller drug and biotech concerns. Healthy gains await patient investors.

Download the PDF article here.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.