Five Things Investors Should Think About with a Hillary Clinton Presidency
While various mathematical outcomes are all still on the table in the House of Representatives, and the final majority count in the Senate is a toss-up, the smart money further suggests that a GOP-led House is also the most likely scenario. What should investors be prepared for as they prepare for four new years of a Democrat in the White House and a Republican-led Congress, and will it look much different than the way the last four years have gone, with the same branded uniforms in charge? I would propose the following five areas for consideration as Election 2016 comes to a close, and a new (but not that new) leadership paradigm takes hold in Washington D.C.
Many moderates who were not opposed to a Hillary Clinton Presidency, and certainly many of her loudest advocates on Wall Street (she has plenty of those) have hoped/assumed that Hillary would be running for a third term of a Bill Clinton Presidency. From NAFTA (free trade), to welfare reform, to capital gain tax reduction, to bank deregulation, the 1990′s/Bill Clinton years are widely thought of as market-friendly and business-friendly, particularly compared to most modern Democrats (Obama, Carter, Johnson, to name a few). A primary season that forced a shockingly competitive race against socialist, Bernie Sanders, and a campaign that has featured more than its fair share of surprises, has forced many market participants to wonder if Hillary is running more for a third term of Barack Obama than a third term of Bill Clinton. From Keystone to TPP to tax policy, it is a different Hillary Clinton preparing to take the helms in the oval office, unless one believes she will govern to the right of where she has been campaigning. That isn’t a totally unlikely proposition, but regardless, investors have several areas in which caution ought to be exercised when they look into the face of a Hillary Presidency. The following five areas are where we would suggest the most cautious consideration. You will note that this list is based on where we think a President Hillary could actually have an impact on markets, not where her proposed policies are merely market-unfriendly. In other words, while we may find a 44% tax on what is presently considered long-term capital gains to be disastrous for stock investors, we see no scenario in which it would have the support needed to become law. Our list is where we think there is not merely rhetorical impact on investors, but potential real impact.
1. The Prescription drug sector
The Hillary Clinton campaign has rather consistently made an issue out of the “outrageous costs” of prescription drugs, and has utilized not just the policy briefings on her website, but populist rants on Twitter to hit her points home. What ought to create a pause for biotech and pharma investors is not the mere posturing, but the fact that this becomes an extremely viable place for political capital to be used, as many GOP leaders in the House and Senate have joined the fray in condemning big pharma. There is significant need to vet how drug prices can come down (a far more competitive landscape would be a great place to start, since, you know, we live in a market economy), and there is tremendous need to improve the current system. Why are we advising caution here? Hillary’s suggestions all amount to some form of price-fixing, and the first step of governmental invitation to price-fixing is not generally the last. A nationalized policy around drug prices is a great way to destroy R&D, suppress innovation, and negatively impact long term prospects in the industry that creates life-saving and quality-of-life-enhancing drugs and devices. Is this political risk priced in already? We think it may be to some degree, but we also believe the lay of the land after the election may very well lend itself to a far worse outcome than markets expect.
2. Energy for Good and for Bad
On one hand, Hillary is unlikely to restrict fracking and drilling and exporting opportunities for the oil and gas sector much more than President Obama, but on the other hand should she follow through on some of the sillier threats of her campaign, she could very well bid these fossil fuel prices way up through the law of unintended consequences. Attempting to use executive orders to throw a bone to environmental allies could artificially suppress production below demand levels, causing prices to jump, providing bigger incentives to the E&P companies already online for more production. Our investment expectation is that Hillary promotes a “clean energy” agenda through a combination of silly, token measures, and yet also promoting natural gas the cleanest fuel possibility needed to advance 21st century energy needs. Her need to soothe both environmental extremists and also rational market needs will result in some degree of incoherence, but is not likely to derail the energy infrastructure needs of the country which have been responsible for most economic growth over the last seven years. There will be increased volatility in the space because efforts to change the tax treatment of MLP’s will get another hearing, and because more anti-pipeline conversation will surface, but we expect the end result to be (worst case) grandfathering of present operators, and probably something more favorable than that.
3. Restaurants, Consumer, Apparel, Retail
An area we would be particularly bearish on would be those that (a) Already face significant secular headwinds apart from the political climate, and then (b) Face an environment that will exacerbate, not heal, those problems. We cannot think of a space that applies to more than those areas facing the pressures of e-commerce, perversely high lease costs, and now skyrocketing unit labor costs – particularly with state and federal minimum wage pressures. Margins are hard to come by as it is; paying the busboys what the managers used to make cannot be a step in the right direction.
4. Municipal bond investors
There can be few doubts that a Clinton administration is well aware of the dire straits many blue states find themselves in fiscally, and how important it is that access to an ongoing gravy train of financing be available for the continuation of the blue state model. Significant support in rhetoric for troubled areas (the Detroits and Puerto Ricos of the current administration will be the Chicagos and New Jerseys of the next) is expected, but so is a tax climate that encourages a continuing healthy market for municipal supply and demand. Yields are already dangerously low, but we see it as highly unlikely that Hillary will take on the unions and pensioners in any meaningful way. The gravy train will roll on.
This is not an easily investible term, but we think some form of fiscal stimulus will find bipartisan support in a Hillary first term. The funds are not likely to be deployed any more effectively than they were in the Obama stimulus plan, but they can’t very well be spent much worse. Some form of exposure to industrials, construction, and the materials sector will likely pay off.
In conclusion, Hillary Clinton is likely to create more volatility in the energy sector, more problems in big pharma, more moral hazard for municipal finance, more headwinds for retailers, and more boondoggles for crony infrastructure projects. These are nuanced suggested impacts, but more actionable than the mere stamping of “market friendly” or “market unfriendly” many commentators and investment minds are attracted to. Fundamentally, the number one thing that will impact Hillary Clinton’s introduction to markets in 2017 are far outside of her control or that of the Congress, and that is the pace of the slowdown in China, the posture of the Yellen-led Fed, and of course, the behavior of central banks in Europe and Japan. Investors looking to Hillary or Trump to move the needle much in these areas will be sorely disappointed.
Originally published on Forbes.