U.S. Election Preview- Stocks to watch and Investment Lessons to Understand

As the November 5 U.S. presidential election approaches, the race between Democratic candidate Vice President Kamala Harris and Republican nominee Donald Trump is adding a layer of uncertainty for Wall Street. This comes at a time when markets are already navigating challenges related to interest rates, the labor market, and ongoing geopolitical conflicts in Europe and the Middle East. Despite the neck-and-neck polls, investor sentiment remains steady. The S&P 500 Index has continued to rise, hitting 47 record highs in 2024. 

Betting markets are showing significant shifts, with odds of a Republican sweep reaching 40%, largely driven by changes in swing state polling. Former President Trump has gained ground, and the latest betting market averages suggest he now holds a 55% to 45% advantage. This marks the largest gap in favor of Trump since Vice President Harris entered the race. These movements are mirrored in the dollar's performance, with the USD narrowing its undershoot against fair value as election odds shift, while market participants keep a close eye on potential policy changes that could arise from the outcome.

Swing states are leaning narrowly towards Trump, and Senate races are tightening, particularly in key battleground states like Michigan, Wisconsin, Ohio, and Pennsylvania. Though Democrats still lead in some Senate polls, margins have shrunk, contributing to the rising odds of a Republican sweep. However, we caution that immediate market impacts may be more muted than expected. Once election results are clear, markets will focus on adjusting strategies based on the likely policy direction of the incoming government.

Billionaire investor Stanley Druckenmiller expressed his belief that the stock market is anticipating a victory for Donald Trump in the upcoming presidential election. In a Bloomberg interview, he pointed to sectors such as banking and cryptocurrency, which have seen strong performance (citing ETFs like KBE, KBWB, KRE, BITQ, and FDIG), as evidence of market optimism. He also mentioned Trump Media & Technology (DJT) as another example of a company benefiting from expectations of deregulation under Trump.

Druckenmiller downplayed the likelihood of a blue sweep, predicting instead that a red sweep is more plausible. He believes such an outcome would boost animal spirits in the business community through deregulation and could lead to short-term economic strength. He warned that bond markets, which he feels already misprice the economic outlook (referencing SPLB, GBF, SPIB, and BSV), could respond negatively, potentially disrupting an equity rally.

However, as the 2024 U.S. Presidential election approaches, the race between Kamala Harris and Donald Trump remains tight, highlighting the risks of over-relying on poll data as a predictor of outcomes. Polls, while useful snapshots, have proven inconsistent in past elections, making it critical not to place too much faith in them. At the same time, the markets continue to face significant uncertainties, driven by the macroeconomic environment, shifts in monetary policy, geopolitical tensions, and the unpredictable nature of the election itself. Investors must remain cautious, understanding that the dynamics of the race can change rapidly and affect economic outlooks.

A Broad Look at Policies and Beneficiaries

The Harris Portfolio

If Kamala Harris were to become president, her administration could bring significant focus to sectors like technology and green energy, aligning with her progressive stances and strong ties to Silicon Valley. As a former California Attorney General and Senator, Harris has received notable endorsements from tech leaders due to her balanced approach of encouraging growth while promoting responsible governance in the sector. This connection could lead to favorable policies for the information technology industry, particularly around issues like artificial intelligence and innovation.

Known for her progressive climate stance, Harris has garnered endorsements from major environmental groups and was an early supporter of the Green New Deal. In her 2020 campaign, she proposed a $10 trillion energy transition plan focused on infrastructure like electric grids, battery storage, and renewable energy sources like solar and wind. Following her 2024 candidacy announcement, oil-tied ETFs like XLE and VDE dipped, while renewable energy ETFs like ICLN and GRID saw gains, reflecting investor confidence in a greener future. 

Harris would likely continue to prioritize clean energy, overseeing the implementation of the Inflation Reduction Act (IRA), which allocates substantial funding for renewable energy projects. Domestic manufacturers in the solar and wind sectors could benefit from her focus on expanding green energy jobs. Additionally, Harris has supported the Bipartisan Infrastructure Law, which, along with the IRA, provides $30 billion for electric grid improvements, positioning industrials and alternative energy companies for growth, especially those involved in electric grid infrastructure and clean energy manufacturing.

Additionally, the discussion around cannabis legalization has heated up, with the Department of Justice considering reclassifying marijuana, further supporting sectors that could thrive under Harris's progressive policies.  A Harris victory in November would likely benefit cannabis stocks due to her potential to push for rescheduling and regulatory reforms. Following Biden stepping down and Harris becoming the Democratic nominee, cannabis stocks such as Canopy Growth Corporation (CGC) surged 17%, Jushi Holdings (JUSHF) rose 7%, Cresco Labs (CRLBF) gained 6%, and the AdvisorShares Pure US Cannabis ETF (MSOS) increased by 6%. We would note that passage of a Federal legalization would require 60% of Congress, an unlikely scenario for the Democrats. 

Clean Energy and Electric Vehicles. Harris's focus on combating climate change could further boost the already growing clean energy sector. Consider companies like First Solar (FSLR), NextEra Energy (NEE), and Tesla (TSLA).

Harris's plans to expand the Affordable Care Act could benefit health insurers and hospital operators. UnitedHealth Group (UNH), Cigna (CI), and HCA Healthcare (HCA) are worth watching.

Harris has emphasized the need for improved national cybersecurity. Companies like CrowdStrike (CRWD), Palo Alto Networks (PANW), and Fortinet (FTNT) could see increased demand.

During Trump's presidency, one of his defining policies was his hardline approach to China, which included implementing broad tariffs on Chinese goods. If Trump were to win a second term, he is expected to continue or even escalate this blanket tariff policy. In contrast, under the Biden administration, where Harris has served as vice president, tariffs on China have been more targeted, focusing on specific sectors rather than broad-based measures.

As a result, a Harris presidency could lead to a relief rally for Chinese stocks and U.S. companies with significant ties to China, as her administration would likely continue a more measured approach to tariffs. This shift could ease some trade tensions and provide relief to markets that are sensitive to U.S.-China relations. Retailers that could be spared by a lack of tariffs include Dollar General (DG), Ralph Lauren (RL), and E.L.F. Beauty (ELF). 

The Trump Portfolio

Donald Trump and his past administration's policies suggest that sectors like aerospace, defense, financials, and construction would see significant gains under a Trump presidency. During his previous term, defense procurement surged by 24.8%, reflecting his commitment to military readiness. His current policy agenda also emphasizes strengthening the military, which would likely result in increased demand for defense contractors and aerospace companies. Companies like Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon Technologies (RTX) would stand to gain from higher defense budgets and potential new government contracts.

In the financial sector, Trump successfully rolled back parts of the Dodd-Frank Act, reducing regulations and potentially boosting profitability for financial institutions. Additionally, his proposal to charter 10 new cities on undeveloped federal land and streamline infrastructure project approvals could drive growth in the construction and engineering sectors, generating demand for firms involved in these industries and spurring infrastructure development. Financial services that could benefit from Trump's pro-deregulation stance include large banks such as JPMorgan Chase (JPM), Goldman Sachs (GS), and Morgan Stanley (MS) thanks to reduced regulatory burdens and potentially higher profitability.

A second Trump presidency could have significant implications for various sectors, particularly the energy industry. Trump's past administration was marked by deregulation in the fossil fuel sector, which benefited major players like Exxon Mobil (XOM) and Chevron (CVX). Under a similar approach in the future, smaller, more agile shale companies such as Pioneer Natural Resources (PXD) could also experience gains. The energy sector, especially fossil fuels, would likely thrive with deregulation and pro-oil policies at the forefront of Trump's agenda.

Additionally, Trump's infrastructure initiatives could provide a boost to companies involved in construction and materials, such as Caterpillar (CAT) and Vulcan Materials (VMC), with increased government spending likely to fund various projects. 

The pharmaceutical industry, which enjoyed favorable policies under Trump, might continue to see less regulatory pressure on drug pricing, benefiting companies like Pfizer (PFE), Merck (MRK), and Johnson & Johnson (JNJ). On the other hand, Humana could benefit from a more lenient stance on private Medicare plans if regulatory pressures are reduced under a Republican administration.

Other names to watch in a "GOP long portfolio" include key companies across various sectors that are expected to benefit from policies supporting American manufacturing, domestic drilling, and deregulation in banking. Notable stocks include 3M (MMM), General Dynamics (GD), Halliburton (HAL), and financial giants Goldman Sachs (GS) and Citigroup (C). These companies align with Republican priorities like boosting domestic production and reducing regulations. 

Additionally, the portfolio features digital currency-friendly companies such as Coinbase (COIN) and Robinhood (HOOD), reflecting the GOP's support for Bitcoin mining and self-custody of digital assets. The platform also includes Trump Media & Technology Group (DJT), the owner of Truth Social, which is tied to Donald Trump's media ventures.

Election Proof Portfolio?

Contrary to popular belief, or at least impossible for media to report on, there are some areas where the two candidates agree. 

The homebuilding sector is poised for growth regardless of who wins the upcoming presidential election, as both Harris and Trump have policies that would benefit real estate development. Harris has proposed building 3 million new homes and providing down payment assistance to address the housing crisis, while Trump aims to reduce zoning and permitting restrictions to accelerate real estate projects. Companies in this sector, such as major homebuilders, stand to gain from either approach, making this a resilient industry to watch.

Small-cap stocks, which tend to rally significantly between the election and the inauguration, could also thrive in this period. The iShares Russell 2000 ETF (IWM), which tracks the Russell 2000 Index representing small-cap U.S. equities, offers broad exposure to these stocks. The ETF provides a buffer against the impacts of sector-specific policies and is a solid investment to consider, especially given the historical performance of small caps around election transitions.

Big tech companies, including Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL), are likely to continue thriving regardless of political leadership. Despite scrutiny from both parties, these companies dominate their markets and have shown resilience through various regulatory pressures. Their strong market positions and innovation capabilities make them well-positioned to succeed regardless of policy changes.

Consumer staples, which produce essential goods, are another sector that tends to perform steadily regardless of political climates. Companies like Procter & Gamble (PG), Coca-Cola (KO), and Walmart (WMT) offer stability as they provide everyday products that consumers consistently need. 

Similarly, healthcare innovators, such as Moderna (MRNA) and Regeneron Pharmaceuticals (REGN), could thrive under either administration, given the ongoing demand for medical innovation and biotechnology advances. These sectors are likely to remain strong due to their essential nature and the growing focus on healthcare improvements.

Of course, none of this will matter if we continue to see yields creep higher. At some point, the eventual winner will have to address the ongoing fiscal issues facing the country. 

Political ETFs- Are they worth the Investment?

There are a number of "politically motivated" ETFs that offer investors the potential to easily invest in either candidate. A little research into the names suggests they may not be as closely tied as one would think.

God Bless America ETF (YALL)

The God Bless America ETF (YALL) primarily tracks U.S. companies, actively managed with a focus on avoiding those that are perceived to emphasize left-leaning political activism or social agendas. It provides broad exposure to U.S.-listed stocks across various market capitalizations. The ETF is designed to align with investors who prioritize traditional, non-political business fundamentals.

The top holdings in the YALL ETF include well-known companies such as NVIDIA (7%), Tesla (5.64%), Broadcom (4.94%), HCA Healthcare (4.81%), and Charles Schwab (4.64%). Other notable names in the portfolio are Amgen, Boeing, and Costco, collectively representing nearly 50% of the fund's assets.

To be honest, we do not see a convincing argument that this achieves the goal of a "Trump Basket". Tesla makes sense given Elon Musk's support of Trump. One could make the argument for SCHW being financial and there would be less regulation but, overall, this does not strike us as a strong basket. 

American Conservative Values ETF (ACVF)

The American Conservative Values ETF (ACVF) is an actively managed fund that invests in large-cap U.S. companies aligned with conservative political values. It avoids companies perceived to support agendas contrary to these values, offering a portfolio that appeals to investors seeking to invest based on conservative principles.

The top holdings in ACVF include prominent companies such as NVIDIA (7.57%), Microsoft (4.59%), Berkshire Hathaway (2.79%), Broadcom (2.16%), and Home Depot (1.83%). Other major holdings include Eli Lilly, Costco, and Exxon Mobil, collectively representing over 27% of the ETF's total assets.

Once again, we fail to see how this can be viewed as a political ETF given its holdings. Berkshire receives a heavy weighting, yet Warren Buffett came out in support of Kamala Harris.  XOM makes sense given Donald Trump's campaign message of "drill, baby, drill" but one can gain better exposure by simply looking at the XLE. 

Point Bridge America First ETF (MAGA)

The Point Bridge America First ETF (MAGA) tracks an index of U.S. large-cap companies whose employees and political action committees (PACs) are highly supportive of Republican candidates. This ETF is focused on aligning investments with conservative political values, and its holdings are weighted equally to increase exposure to smaller companies within the S&P 500.

Some of the top holdings in the MAGA ETF include companies such as Vistra Corp, Constellation Energy, Robinhood Markets, Blue Owl Capital, and Apollo Global Management. The ETF avoids heavy concentration in the technology sector, offering a more diversified exposure across other industries.

This ETF makes more sense to us as it concentrates itself into energy and financials, particularly wealth management, and avoids overexposure to the energy sector. Both ACVF and YALL had NVDA as its top holding which suggests they simply wanted to anchor the ETFs to the best stock on the planet more than track "conservative" investing values. 

Democratic Large Cap Core ETF (DEMZ)

The Democratic Large Cap Core ETF (DEMZ) tracks an index of large-cap U.S. companies whose employees and political action committees (PACs) are highly supportive of Democratic candidates and causes. This ETF provides exposure to companies that align with Democratic values, investing in corporations that meet specific political contribution thresholds.

Some of the top holdings in DEMZ include NVIDIA (5.28%), Apple (5.06%), Loews Corporation (5.02%), Costco (4.66%), and Microsoft (4.46%). The ETF also includes other major companies like Meta Platforms, IBM, and Amphenol. The fund's holdings cover a diverse range of industries while focusing on large-cap stocks from the S&P 500.

Well, apparently NVDA is going by the adage of vote early and vote often" just for both sides. This is why you want to be careful about using these ETFs. 

Unusual Whales Subversive Democratic Trading ETF (NANC)

The Unusual Whales Subversive Democratic Trading ETF (NANC) primarily invests in equity securities that are purchased or sold by Democratic members of Congress and their spouses. It seeks to track the investments of these individuals based on their disclosures under the STOCK Act.

As of October 2024, the top holdings in NANC include NVIDIA (12.80%), Microsoft (7.90%), Amazon (4.49%), Salesforce (4.32%), and Apple (4.18%). These companies represent a significant portion of the ETF's assets, with a focus on technology stocks, which make up over 40% of the portfolio. Other notable holdings include Alphabet, American Express, Costco, and Eli Lilly[

Unusual Whales Subversive Republican Trading ETF (KRUZ)

The Unusual Whales Subversive Republican Trading ETF (KRUZ) tracks investments based on trades made by Republican members of Congress and their spouses. It aims to align with political disclosures under the STOCK Act, which mandates transparency around congressional trades. 

The top holdings in the KRUZ ETF include JPMorgan Chase (3.96%), NVIDIA (3.65%), Comfort Systems USA (3.25%), Fidelity National Information Services (2.49%), and Simon Property Group (2.46%). Other notable companies in its portfolio are Accenture, Chevron, and Dow. The ETF provides exposure to a wide range of industries, from finance and technology to energy and healthcare.

Looking at the NANC and KRUZ ETFs we do see a difference in the holdings with the Democrats being heavy on tech while Republicans lean more into financials and energy. Everyone continues to love NVDA which means you should as well. 

The Tax Plans, Fiscal Policies, and Yields

Perhaps the biggest complaint about both candidates has been the lack of a plan to address the fiscal situation in the U.S. 2025 will be frought with contentious budget battles leading to plenty of worries about a default. In this section we wanted to take a look at the tax plans for both candidates and what it could mean for the U.S. debt situation moving forward. 

Harris Tax Plan

- Extend Trump's 2017 tax cuts for Americans earning less than $400,000 annually.

- Expand the child tax credit to $3,600 from $2,000, and increase it to $6,000 for households with children under one year old.

- Exempt tipped wages from income taxes, but still apply payroll taxes.

- Expand the earned-income tax credit to benefit more low-income workers.

- Make permanent the enhanced Affordable Care Act tax credits, ensuring ongoing support for healthcare affordability.

- Increase the low-income housing tax credit to address housing affordability.

- Provide a $25,000 down-payment credit for first-time home buyers to assist with homeownership.

- Introduce a new tax credit for home construction and rehabilitation to encourage development.

- Increase the startup expense tax deduction from $5,000 to $50,000, supporting entrepreneurship and small business growth.

Trump Tax Plan

- Make permanent the 2017 tax cuts, which are set to expire next year.

- End the tax on tipped wages.

- Eliminate the tax on Social Security benefits.

- Potentially raise the child tax credit to $5,000, a proposal by J.D. Vance (Trump's stance is unclear).

- Provide a tax deduction for major newborn expenses, with a possibility of offering free in vitro fertilization.

- Reduce the corporate tax rate to 15% (from 21%) for companies manufacturing their products in the U.S.

- End the tax on overtime pay.

- Remove the $10,000 cap on state and local tax deductions from the 2017 tax law.

- End double taxation of Americans living abroad.

- Offer a tax deduction for home generators purchased since September 1.

- Provide a tax deduction for interest on car loans.

The Committee for a Responsible Federal Budget (CRFB) estimates that Trump's tax proposals, including making his 2017 tax cuts permanent and providing breaks for overtime pay, Social Security benefits, domestic manufacturers, and tipped income, would cost more than $9 trillion over the next 10 years. Meanwhile, Harris's tax plans, which include extending the 2017 tax cuts for those earning under $400,000, expanding the child tax credit and earned-income tax credit, making Affordable Care Act credits permanent, and eliminating taxes on tips, are projected to cost more than $5 trillion over the same period. Both candidates have proposed tax increases to help offset these costs. Trump's universal tariff plan, with a 20% tax on imports and a 60% tax on goods from China, is estimated to raise $2.7 trillion over a decade, while Harris's proposals to reverse Trump's tax cuts for high earners and raise corporate taxes could generate $4.3 trillion.

A Harris victory would likely result in fewer surprises on the inflation front, enabling the Federal Reserve to continue its path of lowering interest rates, which began in September 2024. As falling interest rates typically boost bond prices, bonds are expected to rally, particularly at the start of a Harris presidency. A Bloomberg survey suggests that investors are more inclined to maintain their bond holdings under Harris than under a second Trump term. Nearly half of the respondents indicated they would reduce their bond positions under Trump, while only 23% would do so under Harris, further supporting bond prices in the event of her win.

If interest rates continue to fall under a Harris presidency, rate-sensitive industries like banking and real estate could see gains. The Federal Reserve is expected to continue cutting rates regardless of the election outcome, making this more of a macroeconomic trend than one tied specifically to Harris. However, her potential presidency would benefit from this rate-cutting environment, as would industries sensitive to interest rates. Other sectors likely to benefit from lower rates include materials, industrials, and utilities.

Conclusion and Basic Investment Advice around Elections

As the 2024 presidential election approaches, it's important for investors to maintain a long-term perspective and not be swayed by short-term market volatility. Regardless of the outcome, focusing on a diversified portfolio can help mitigate risks and ensure you're not overly exposed to any one sector or outcome. Elections can cause fluctuations, but historically, markets have trended upward over the long term, no matter which party holds office. 

Consider sector ETFs that align with potential policy changes to gain exposure to sectors likely to benefit, while avoiding the risks tied to individual stocks. Additionally, implementing a dollar-cost averaging strategy can help manage market volatility, allowing you to invest gradually and reduce the impact of poor timing. 

Finally, staying informed about policy proposals and their potential effects on different sectors is crucial for adjusting your strategy as needed. While the election is a major event, remember that global economic conditions, technological advancements, and unforeseen events also shape market performance. Consulting a financial advisor is always advisable to ensure your strategy aligns with your financial goals and risk tolerance.

Historically, stocks tend to gain further momentum following the election, offering the potential for another boost. Since 1945, the market has averaged an 11% annual return under Democratic presidents and 7% under Republicans.This figure includes the significant downturn during George W. Bush's presidency amid the Great Recession from 2008 to 2009.