The Investment Implications of the 2016 Election

MORRISTOWN, N.J., Nov. 4, 2016 /PRNewswire/ -- Next week's elections are among the most hotly contested in recent history. Undoubtedly, there will be winners and losers beyond the individual candidates running for office. In this report, we analyze some of the potential investment implications of the election, while maintaining a neutral tone with respect to any political party. Our analysis is based largely on the stated positions of each major party's Presidential candidate, Hillary Clinton or Donald Trump, and the research of unrelated parties.

What Wall Street Really Wants – A Split Decision

First, the market tends to favor a "split decision" with respect to which political party controls the White House, Senate and House of Representatives. Under this "split decision" or "gridlock" scenario, it will be challenging for either party to enact major legislative changes, allowing free market forces, not central planning, to drive the economy's future.

Most projections suggest the Republicans will retain the majority of positions in the House of Representatives, while the Democrats are likely to gain control of the Senate. If these projections hold true, regardless of which Presidential candidate wins the White House, one party will not sweep all three elections, resulting in Wall Street's desired split decision.

But we caution that a split decision is not always a panacea, since it may delay progress on important issues, such as addressing the projected deficits in Social Security, Medicare, and Medicaid. An extension of the debt ceiling in 2017 will also be necessary, potentially creating a contentious battle viewed unfavorably by the financial markets.

And The Winner Is … Infrastructure

If there is one common sector or industry that is likely to do well under either candidate, it is infrastructure. Infrastructure includes the repair or building of bridges, roads, tunnels, airports, power grids, communication networks and may even be extended to items such as electronic medical records. Candidate Clinton proposed $275 billion in government spending on infrastructure over a five-year period and having another $225 billion spent on infrastructure through private investment. Candidate Trump has proposed an even larger plan, spending up to $1 trillion on infrastructure, through a mix of governmental and private sources, over a ten-year period.

The benefits of preventing a crumbling bridge are obvious, but the implications of a stronger and smarter infrastructure may not be quite as apparent. For example, smarter and properly maintained transportation networks may be able to reduce traffic congestion, commuting times and the number of accidents. An enhanced power grid may reduce the likelihood of blackouts and conserve energy. An improved electronic medical records system may improve the quality of healthcare, reduce medical errors and cut insurance payments. Each of these items may result in increased productivity for the economy over a long period of time.

Energy and Healthcare Policies: A Tale of Two Cities

The Presidential candidates have sharply different policies in the Energy and Healthcare sectors. Candidate Clinton favors further progress in the direction of a "green" future for America's energy needs. Solar, renewable energy and natural gas firms may be prime beneficiaries under her energy plan. In contrast, candidate Trump has strongly supported "clean coal" technology as well as conventional oil and gas energy sources. He supports the Keystone Pipeline, which plans to run from Canada through the United States, so long as the deal is "favorable" for America. In contrast, candidate Clinton has announced her opposition to the Keystone Pipeline.

Candidate Trump is vehemently opposed to the Affordable Care Act, popularly known as "Obamacare." If elected, he plans to repeal Obamacare, although a full dismantling of the program may be challenging without Congressional approval. Candidate Clinton favors slight modifications to Obamacare and price controls on some pharmaceutical products. She expressed outrage at firms, such as Mylan, maker of the EpiPen, after the firm raised the price on its product more than 450% in less than ten years. Similar large price increases have been observed in pharmaceutical products with little or no competition. Candidate Trump favors competition and market forces as a way of modulating prices as opposed to formal price controls.

In our view, hospitals and health maintenance organizations (HMOs) are likely winners under a Clinton victory, while traditional Pharmaceutical and Biotechnology firms, especially those that produce high priced drugs, are likely losers. The reverse is likely true under a Trump victory.

Some Relief May Be in Sight for the Financial Sector

The Financial Sector has been dramatically impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which resulted in the largest set of new financial regulations since The Great Depression. Financial firms – primarily the large, national banks – have also been hit with billions of dollars in fines due to misdeeds committed during the period leading up to The Great Recession of 2007-2009. Candidate Trump has stated that he favors repealing the bulk of Dodd- Frank, claiming it makes it nearly impossible for bankers to function.

Candidate Clinton has supported Dodd Frank, especially in the context of large "too big to fail" banks, and seems to favor a tax on short-term trading activity. However, she seems to have a more dovish view on bank regulation than the Obama administration. For example, she has expressed support for reducing the regulatory burden on community banks. In her speeches to banks, in a private setting, she has expressed a somewhat more balanced approach to financial regulation.

A (Tax) Holiday May Be on the Horizon … For Corporate America

American corporations labor among the highest tax rates in the industrialized world, with domestic firms generally in a 35% tax bracket. In contrast, other regions, such as Bermuda, charge no corporate taxes, while others, such as Ireland and Canada, have a net tax rate of 15% or less. One implication of these widely varying tax brackets is that corporations tend to keep cash and securities held for investment, overseas. American companies hold roughly $2 trillion dollars in cash, with the vast bulk of it held overseas. For example, Microsoft recently held $96.3 billion of its $102.6 billion in cash (94%) overseas. If a firm brings money held overseas back to America (i.e., repatriates its cash), it is subject to paying tax at the 35% federal rate.

Both candidates have supported a "tax holiday" for cash held overseas, resulting in a temporary tax rate of 15% or less. Candidate Trump has proposed slashing the U.S. corporate tax rate from 35% to 15%. If enacted into law, a 15% corporate tax would be a large boon to companies, such as Costco, Home Depot and Chipotle that derive most of their profits domestically. Candidate Clinton has not endorsed cutting the corporate tax rate to 15%, but seems amenable to the tax holiday. In theory, if firms repatriate their cash, it may result in sizeable investment increases in the domestic economy. However, if the last tax repatriation period (2004/2005) is any indication, the bulk of the cash will be used for stock buybacks and dividend increases, which may also be a benefit to shareholders.

Your Income Taxes May Be Going Up… Or Down

Another sharp contrast between the two candidates is in their personal income tax policies. Candidate Trump has proposed a tax cut for virtually all domestic taxpayers. However, his plan may also increase the national debt between $5 and $10 trillion, according to several independent estimates.

In contrast, candidate Clinton has proposed a tax cut for most low- and middle-income families, but a tax increase for the highest income earners, those earning more than $250,000 a year. She favors a "Buffett Rule," requiring a minimum effective tax rate of 30 percent on incomes over $1 million. She has also proposed an additional 4 percent "fair share surcharge" for those earning $5 million dollars or more a year. Analysts estimate that candidate Clinton's tax plan, if enacted, would raise in excess of $1.5 trillion in new revenue, with the proceeds being spent on her domestic initiatives, such as on infrastructure and educational programs. Both candidates have proposed closing the "carried interest" tax loophole, which currently enables (mostly high income) individuals to convert earnings to long-term capital gains, generally taxed at a 15% rate. A more detailed summary table, produced by the website, Diffen.com, is reproduced below.

International Trade Policies: A Potential "Black Swan" On the Horizon

Another stark contrast in the economic policies of the two candidates is apparent in their views on international trade. In general, both candidates favor a less open policy on international trade, relative to recent Presidential administrations. This could result in "risk-off' investment sentiment that would benefit US Treasury debt and the U.S. Dollar.

Candidate Trump strongly supports repealing the North American Free Trade Agreement (NAFTA), rejects the proposed Trans-Pacific Partnership (TPP) and has taken a hardline stance on China, deeming it a "currency manipulator," a tactic that would likely sour relations with the country that is home to the world's second largest economy. His positions on international trade may be a positive for U.S. firms that have been hurt by cheaper overseas imports, such as steel companies, and defense firms that are likely to benefit from increased spending on national security.

In contrast, candidate Clinton has expressed support for NAFTA and has declined to formally accuse China of currency manipulation. Although she was once supportive of TPP, her current stance seems to be against the prospective Partnership.

Between a third and half of the profits for S&P 500 firms come from overseas. The stock market, in aggregate, seems to dislike candidate Trump's position on international trade. His policies, if enacted, bring an element of uncertainty to corporate profits, as well as increase the risk of trade wars with foreign countries, most notably with China.

Conclusion

Political elections are one of the greatest change agents of the American economic system. The contrast between the two Presidential candidates, Hillary Clinton and Donald Trump, is the starkest in recent memory. There appears to be less drama in the Congressional elections, with most forecasters predicting a split decision, with Republicans maintaining control of the House and the Democrats gaining control of the Senate. This type of result is generally cheered by Wall Street, which likes "gridlock" so the free market system can drive the economy.

But make no mistake, there will be clear winners and losers, beyond the candidates running for office. A summary table on our views is in the Appendix that follows. To some extent, the market has already priced in some of the anticipated movement. For example, Healthcare stocks have lagged the market on a year-to-date basis, and the Mexican Peso has risen versus the U.S. Dollar, anticipating a Clinton victory. However, the election is too close to call and we believe there is a high likelihood of a sharp move in the market, regardless of who wins, as some uncertainty is resolved and cash either pours into the market, or flees it. We welcome a further discussion of the investment implications of the election on your personal portfolio at any time and we encourage you to exercise your privilege to vote.

Important Information: Beacon Trust ("Beacon") is the name used by two separate investment advisers and a trust company: Beacon Investment Advisory Services, Inc. ("BIAS"), Acertus Capital Management, LLC ("Acertus") and Beacon Trust Company ("BTC").  Both BIAS and Acertus are SEC registered investment advisers wholly owned by BTC, which is a subsidiary of Provident Bank. Provident Bank is a subsidiary of Provident Financial Services, Inc, a holding company whose common stock is traded on the New York Stock Exchange. Beacon does not provide investment advice for any affiliated securities or obligations. Additional information is contained in the respective Form ADV disclosure documents, the most recent versions of which are available on the SEC's Investment Adviser Public Disclosure website at http://www.adviserinfo.sec.gov.

SECURITIES AND INVESTMENT PRODUCTS: NOT FDIC INSURED - MAY GO DOWN IN VALUE – NOT GUARANTEED BY A BANK OR BANK AFFILIATE - NOT A DEPOSIT - NOT INSURED BY ANY GOVERNMENT AGENCY

This publication is limited to the dissemination of general information pertaining to the wealth management products and services offered by Beacon to U.S. residents of those states where not prohibited by applicable law. No portion is to be construed as a solicitation to effect transactions in securities or the provision of personalized investment, tax, or legal advice. Investing involves risks which may lead to losses, including loss of principal. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable.
Past performance is not a predictor of future results. It should not be assumed that any information discussed herein will prove to be profitable or that decisions in the future will be profitable or provide specific performance results.  Any discussion of tax matters contained within this communication should not be used for the purpose of avoiding U.S. tax related penalties or promoting, marketing, or recommending to another party any transaction or matter addressed herein. Beacon Trust does not provide legal advice.

Before investing, carefully consider fund investment objectives, risks, charges and expenses. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial advisor or Beacon Trust at 973-206-7100 or visit www.beacontrust.com.