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Market Strategy 10/12/2020

  • John Stoltzfus
  • October 12, 2020

All or Nothing at All vs. Come Together Right Now

With just 22 days until Election Day, politicos in Washington remain in a stalemate.
Key Takeaways
  • This week we consider the prospects for the S&P 500’s 11 sectors in light of the presidential election in 22 days.
  • The S&P 500 has rallied 7.4% from a recent low on September 23 through last Friday on the back of economic data that point to resilience in the US economy even as politicians remain at loggerheads over the latest stimulus package.
  • A significant and widening lead in the polls for Biden has lessened the equity market’s perceived risk of a contested outcome in the upcoming US presidential election.
  • Counterintuitively, as stocks have rallied the 10-year bond yield has moved higher. 
american flag and one hundred dollar bill

For all the genuine concern as well as the political rhetoric around the need for another stimulus package political “lines drawn in the sand” continue to hold the potential rescue and aid package hostage.

The dysfunction on Capitol Hill over the issue has been going on long enough that some investors and even some economists—including one prominent member at the Federal Reserve—reflecting on the relative strength of recent economic data have begun to suggest that the earlier stimulus packages (and what remains to be distributed from them) may be enough to carry the economy the distance out of the proverbial “woods” and toward the “next normal” in a post-Covid world.

From our perch on the market radar screen we’d opt for the politicos to come together sooner than later with another round of stimulus/rescue rather than hold out for everything they want and risk extending the Covidderived recession, which was ironically designed by both sides in the form of an economic shutdown to stem the spread of the highly infectious virus.

We can’t help but wonder what the current situation would look like if it weren’t for 2020 being an election year.

Quotation from Aenean Pretium

Ultimately how the various sectors’ attractiveness to investors might be affected has to do with the health of the economy and the ability of companies to adapt to economic conditions.

The Markets

For all the elevation of uncertainty that has come to pass since the start of September—much of it centered around issues tied to the election and its potential outcome—the equity markets stateside and outside the US have been on the mend and even rallying much to the consternation of bears, skeptics, the perennially nervous and even some denizens of the DC Beltway.

The yield on the 10-year Treasury has defied instincts that might have suggested a rally in bonds and lower stock prices as uncertainty rose around the election and as resurgence of COVID-19 cases around the world and in the US threatened the process of economic recovery. Instead the yield on the 10-year Treasury rose some 52.9% from a low of 0.508% on August 4th to 0.786% last Friday in New York.

Opinions differ as to what has worked the proverbial “magic” on the markets—whether it’s the potential of a Biden win—based on what many pollsters are predicting—or a reelection of the President reminiscent of the outcome of the contest in 2016.

In our view the answer lies in a mixed bag of factors including Q3 earnings season which gets underway this week (Tuesday) when the big banks are scheduled to start reporting Q3 results; economic data that has found enough positive offsets to counter recent economic slowing; interest rates that remain near historical lows (notwithstanding a recent move off those lows) as well as a sense that the outcome of the election will not likely result in an extended period of uncertainty as to who actually won and more than anything that the election outcome regardless of who wins might not be the end of the world as we know it.

The Stock Market and the election—which sectors could benefit?

Which could be hurt?

How the election will affect the equity market is forefront on the minds of investors when yields on fixed income (the usual alternative) are so low.

With the age-old portfolio breakdown of 60% (equities)/40% (fixed income) more than ever coming into question among investors in a low inflation, slow growth world, the broadening of investor appetite for equities should not be surprising.

In 2020 the outcome of the election raises the question of how the victorious party will position itself when it comes to business, labor, monetary policy, fiscal policy and the effect of their policies on the markets including those associated with stocks, bonds, real estate, commodities and alternatives.

In our view diversification will remain critical as always in positioning investor portfolios ahead of the election with an eye to whatever the outcome might be.

Here are a number of our considerations in determining how to position this election year:

  • It’s important to remember that economic growth is of importance when it comes to businesses generating revenue and earnings growth.
  • Some sectors are considered cyclical or economically sensitive while others (defensives) are considered to be countercyclical or less sensitive to economic growth.
  • The cyclical sectors: information technology, consumer discretionary, financials, materials, industrials, communications services and energy.
  • The defensive sectors: consumer staples, health care, utilities, and real estate.
  • Designations aren’t set in stone: Some cyclical sectors have members with defensive characteristics; some defensive sectors have members with cyclical characteristics.
  • Cyclical and defensive sectors are found across market capitalizations.

For the purposes of this week’s strategy piece we’ll address the 11 sectors in the S&P 500 from a proverbial “10,000 feet above the landscape”.


From the perspective of its historical timeline the sector appears to be particularly attractive. We view today’s technology as parallel to the automobile in the early part of the 20th century. Information technology today is deeply embedded in the lives of businesses, individuals, governments and all of the other ten sectors. Technology today is not so much changing who we are as human beings but how we execute or how we do the things we do. It is changing the tools we use to work, to study, and to learn, to create, to design and to build, to relax, heal, and to ponder (gather and analyze information) and much more.

Current efforts by both political parties to regulate the sector remind us of earlier historical points on the timeline when the food industry, the health care sector, the railroads, the automobile industry and others came under the examination of governmental regulation. The key issue for technology ahead will be how effective regulation in the space will be in protecting the user of technology while not hurting innovation and profitability.

With China’s emphasis (as well as the rest of the world’s focus) on the importance of technology it would seem pure folly for either the Republicans or the Democrats to deter the progress and leadership of US technology. We rate the information technology sector Outperform.

Consumer Discretionary is a sector in transition moving from analog to digital platforms and a combination thereof to engage its customers, suppliers and its employees. With the consumer of key importance to the US economy (both as service provider as well as employer) politicians on both sides of the aisle would be wise to consider the health and profitability of the sector in any policymaking that could damage the future prospects of the sector. We rate the sector Outperform.

Industrials are a sector key to manufacturing, infrastructure, construction, robotics, energy, aerospace, outer space (satellites, space travel), railroads and trucking equipment, agriculture and defense. The sector has been reinvented over the past decade by technological innovation. The industrials sector ranks among our favorite sectors, with an Outperform rating. With both parties favoring infrastructure spending the importance of the products and services the space offers make it in our view a key sector for a diversified portfolio regardless of which party is victorious in the upcoming election.

Financials – a sector made up of institutions including traditional banks, investment banks, money management firms, insurance companies, and several US credit card issuers among other financial sector players. The sector has been under pressure from historically low interest rates affecting the yield curve over the past decade and currently from concerns that should the economy move deeper into the Covid-19 induced recession the Federal Reserve might raise reserve requirements. If “money makes the world go ‘round” (and we believe it does from an economic, market and societal prosperity perspective)—politicians from either party should consider the importance of these economic institutions to the economy as drivers of business, labor, states and cities and the Federal government itself before making policy decisions. We currently rate the sector Outperform on expectations that an economic recovery lies ahead with the potential of an introduction of a vaccine to effectively stem the spread of COVID-19. In our view the sector has political risk should the Democratic Party win the White House and pivot from center to progressive policies which appear hostile to the sector.

Consumer Staples—this defensive sector is comprised of companies involved in what’s commonly known as “essential products” that in their importance to the lives of their constituency make the sector “counter cyclical” or less sensitive to downturns in the economy. Products include foods and beverages (both alcoholic and non-alcoholic), tobacco, household goods, and hygiene products. Drug store and supermarket chains are among the companies included in this sector known to some in the analytical community as “cokes, smokes, and soaps.”

Materials—a sector made up of companies that make or process chemicals, construction materials, forest products, packaging products, glass, and paper. The sector includes companies involved in mining, refining, and processing metals and minerals. The sector is well positioned to benefit from infrastructure spending stateside and from a global economic recovery beyond Covid-19. The sector could come under pressure with an increase in environmental regulation. We rate the sector favorably with a Market Perform rating.

Communications Services—a sector made up of a diverse collection of businesses ranging from major players in internet services, advertising and media, and telecommunications services. Over 40% weighted in several tech-related members belonging to “the FANGS” the sector near term will remain in the cross hairs of regulation regardless of the outcome of the election in November. That said, the importance and popularity of the services many of the companies in the sector provide to the US consumer suggests that ultimately the companies under scrutiny will not only survive but likely prosper even under an increased burden from regulation so long as it doesn’t damage the innovation process that drives them and attracts investors to them. The sector includes the major telecommunication companies in wireless with broad exposure to 5G. We rate the sector Market Perform. 3

Energy—a sector made up of stocks related to the discovery, production, refining, marketing and distribution of energy. Among its members are the integrated oil companies, refiners, explorers and oil and gas services companies. While the sector is responsible for producing and distributing most of the energy utilized by businesses and consumers stateside and around much of the world it has fallen into disfavor among investors over the past decade as a result of the development and deployment of alternative energy resources and increased environmental oversight. With extensive infrastructure to produce and deliver its products we expect the energy sector to remain “king of the energy complex” for some time into the future though “king” of an increasingly shrinking kingdom over the years ahead. A Republican victory in the upcoming election would likely be more favorable for the sector than a Democratic win. We rate the sector Underperform.

Health Care—the sector includes pharmaceutical companies, medical equipment and diagnostic companies, biotechnology companies, hospital companies and medical insurance companies. Both Republicans and Democrats have their “pencils” sharpened with regards to the cost of drugs and health care services. A Republican victory would likely be more favorable to the healthcare complex while a Democratic win would likely be less favorable. However, the longerterm effect of governmental increased focus on drug prices and medical products and services costs might likely see a reduction in unit pricing made up in volume (usage) as healthcare products and services become more widely available. The extent of government intervention in the sector will be critical as to the effects positive or negative on profitability and innovation within the sector. We rate the sector Market Perform with risks noted.

Utilities—the sector is comprised primarily of companies that produce and deliver services tied to electricity and natural gas. The sector is considered both a defensive sector because of the essential nature of its services and as a bond proxy because of the dividends that many utility companies pay. A Democratic victory could negatively affect utilities should tax policy favoring dividend income be eliminated. Utility companies could also be negatively affected by increased regulation and environmental oversight. Traditional electric utilities produce energy via oil, natural gas, coal, and nuclear energy—all of which are likely to come under increased scrutiny and regulation in the event of a Democratic victory.

The real estate sector includes real estate investment trusts (except mortgage REITS which are part of the financial sector) and companies that manage and develop properties. As a sector it is often utilized as a diversifier toward real assets and as a bond proxy for income. As a bond proxy the sector is known to come under selling pressure from investors when interest rates rise.

The sector could come under pressure with changes to the tax code under consideration by the Democrats. A Republican victory would likely be neutral to positive for the sector. We rate the sector Market Perform.

Ultimately how the various sectors’ attractiveness to investors might be affected has to do with the health of the economy and the ability of companies to adapt to economic conditions. From that perspective the effects of policy decisions by any administration matters regardless of party. That said we have found in our experience that business is like water in seeking the path of least resistance in finding the direction it will take. In the 1950s and in the 1960s taxes were higher in the US and social programs were for much of the period in expansionary mode but profits and stocks overall managed to head in an upward direction during much of that period.

The investment community like politics is made up of a diverse group of individuals and institutions. The complexity of the outcome of an election can best be learned after the election when politicians either do as they said they would do or fail to act in a constructive manner.

Don’t forget to vote.

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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