Which Sectors Stand to Benefit From Election Outcomes

Subscribers to Chart of the Week received this commentary on Sunday, September 15.

There will only be two presidential debates this election cycle now that former President Donald Trump declined to debate Vice President and Democratic nominee Kamala Harris a second time. The first debate yielded a clear winner in Trump, while the second one was decidedly positive for Harris, given her surge in the polls in the following days. Because each candidate received a notable bump in the polls after their respective “wins,” investors got a sneak peek into the sectors that stand to benefit most from either administration.

There’s only so much broad-market data to gather from election years as it pertains to the stock market, given the four-year timeframe and wholly unique economic landscape found within each cycle. Four years ago, the coronavirus pandemic was an emblematic issue and now its barely a talking point. But reading the tea leaves from exchange-traded fund (ETF) performance could set up investors to cash in on the first full week of November, when the results are (hopefully) finalized.

After the first debate on June 27, many felt that President Joe Biden was unfit to run for a second term. Regardless of political leanings, it was a challenging watch, as the President struggled with basic debate principles and let Trump off the hook on several occasions. Fresh off the definitive debate win and a Supreme Court ruling that gave former President Trump broad immunity from prosecution for acts while in office, a return to #45 seemed imminent.

This sentiment sent the bond market reeling, with the 10-year Treasury yield steepening in the days after the first debate, given the two components of Trump’s otherwise hazy economic policy. These include tariffs and unfunded tax cuts, both of which allude to inflationary growth. Note the peak at 4.38% on July 1 in the chart above.

As far as individual equities, a look at ETF performance the three days after the first debate offered glimpses into how November could go for bank, energy, and crypto stocks, three sectors that favor Trump’s propensity to lean toward looser regulations. In the three days after the debate, the Financial Select Sector SPDR Fund (XLF) and Energy Select Sector SPDR Fund (XLE) both added 1.7% and 0.4%, respectively.

Cryptocurrencies acting as a proxy ‘Trump trade’ has gained a lot of traction in recent months, especially as pro-crypto Elon Musk ingratiates himself with the former President. Sure enough, iShares Bitcoin Trust (IBIT) gained roughly 1% in the three days after the first debate. Trump’s hardline stance on immigration sent CoreCivic Inc (NYSE:CXW), a company that owns and operates private correctional facilities, up over 10% between June 28-July 2. Right on cue, CXW shed 1.5% the week after Tuesday night’s debate.

Traditional thinking ties a Republican President to defense stocks, but the ongoing conflict between Israel and Hamas, as well as the continuing grind of Russia’s invasion of Ukraine, likely means that whoever inherits the Oval Office will have to key in on defense spending regardless.

Fast forward two months and a Harris-Walz ticket has provided Democrats a much-needed paradigm shift, a lifeline to salvage this election cycle. A Harris administration means a step forward for alternative energy, homebuilder stocks, and cannabis names. There would be no reversed Inflation Reduction Act that greatly benefitted the electric vehicle (EV) and solar sector, but Trump has promised to roll back. Harris has also promoted an up to $25,000 in down payment support to help first-time homebuyers, a move that could inject some support toward the housing supply shortage.

In the three days following this past Tuesday’s, Sept. 10 debate, iShares Global Clean Energy ETF (ICLN) gained 4.1%, SPDR S&P Homebuilders ETF (XHB) added 5.1%, and the AdvisorShares Pure US Cannabis ETF (MSOS) shed 0.7% in the three days after Tuesday night’s debate. Cannabis is left off the table because, like cryptocurrencies, both sectors will be volatile regardless of who’s in office.

Another sector to watch is tech and semiconductor companies with exposure to China. Trump’s determination to get embroiled in a trade war with China can add complications to companies like Nvidia (NVDA), Taiwan Semiconductor (TSM), and even Tesla (TSLA). It doesn’t necessarily mean tailwinds if Harris wins, but comparatively, she is less likely to upset the established hierarchy and inject volatility into overseas markets.

There’s an obvious bitterness toward politics and divisiveness between parties nowadays. Talking heads and news outlets on either side will argue until they are blue in the face, but the truth is, as always, a moderate middle ground; Wall Street will still be standing no matter who wins in November. Instead of giving into the doom-and-gloom that sells so well, an investment plan for either outcome is what shrewd traders should be doing right now, instead of living and dying by every news chyron.