RHP Market Talk

Presidential Elections and The Markets

October 29, 2020 Royal Harbor Partners Wealth Management Episode 1
RHP Market Talk
Presidential Elections and The Markets
Show Notes Transcript Chapter Markers

Glenn Royal and Natalie Picha with Royal Harbor Partners Wealth Management sat down after the final U. S. Presidential debate to discuss the upcoming elections and share their thoughts on managing investments through the current political cycles.

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Natalie Picha:

Hello, and welcome to market talk with Royal Harbor partners. I'm Natalie Picha here with Glenn Royal, our portfolio manager, to talk about our current presidential election. I am having the conversation with clients on what seems like at least a daily basis, if not multiple times a day , what are we going to do? How are we going to handle this prediction, this particular presidential cycle. And I always come back and I say, we have managed through other presidential cycles and we will manage through this one. What does well in under one particular , presidency may not do well under another and vice versa. And so we've just learned to pivot , which is, which is what we're, we're good at. But I wanted to hear Glenn's thoughts today on where we are in this current election cycle and how we may be making changes as we move forward.

Glenn Royal:

Well, thanks, Natalie. These are great questions and certainly something keeping me up at night. The first thing I want to stress is that I don't have a dog in this fight, I'm just an analyst. So we have to manage money no matter who's elected president. So let's talk a little bit about that. And really this is along party lines, the Democrats and the Republicans. One of the things that the market has been shifting its focus towards is a stronger belief in the polls this time . I think that maybe last time was an anomaly that the polls didn't count, but there's more of a focus of the polls are more accurate. So that's leading the market to believe that Joe Biden will be elected president potentially with the blue wave sweep of all three branches , that starting to be priced into infrastructure assets, starting to be priced into companies that participate in the broadening out of the, of growth in the economy, probably cyclical or type stocks. The setup that I see is the worst case, obviously as a contested election, we don't want to get in a situation where we don't know who the president is until Thanksgiving. Markets don't like uncertainty, right? We , like to know where we're coming from. So that would be problematic. We can just set that aside for a moment, but let's assume it's a clean election. I know that, you know, I'm a contrarian investor attended by things that are out of favor and 90% of the public right now expects a contested election. And it's just gonna be , you know , anarchy if you will. As a contrarian . I think that probability is probably low in nature. We probably will have a clean election and we'll know quick , sooner than, than not. I tell you if you, if you want a handicap that night, there's two states, battleground States to watch in the presidential election. And that's going to be Pennsylvania with 20 electoral college votes. It's a swing state. And Florida that has 28 or 29 electoral college votes. They're both currently little bit towards the Biden side, but within that margin of error. So i f we see those two big States with those two big electoral college votes go one night of the election, that's probably going to give you an idea o f how i t's going to shake out in the morning. So let's set this up. What if it's a Republican, election and a sweep and the president retains president Trump retains the white house and Republicans c an retain control of the Senate h ouse, stays w ith Democrats. I n that scenario, I would say, you've already know what you're going to get. I t'll be more the same. There'll be continued tariff situations like we've seen with China, perhaps expanding to Europe this time, the next four years. And those aren't necessarily market friendly. Those are costly. They take r educe profits and cause disruptions in the supply chain. We'll get through it just like we have this last presidential cycle. I would expect that you would see dollar strength as a result of the nationalism that we see with president Trump, which will mean more o f the same technology stocks still do well. In that scenario, you would probably see me bring money from a broad t hat we have a little bit t here a s we're starting to move out and move it quickly back to the U S towards S and P 500 type stocks. Well, the other hand we go for a blue w ave, if you will, the Biden wins the white house and the Senate. Then there's a question of what majority with the Senate would the Democrats have, if we're only talking 51, 52 senators, that's w ithin that filibuster. So it's still going to be hard for them to get their major tax reform, different legislation like that through, if we, and then even more so if the Senate stays in Republican hands. And so that's the race I'm really watching that n ight more s o t han t he white houses. I w ant t o see what happens in the Senate, if, how that lays out that night, if it is a blue wave, and the Democrats a re able to pick up 55 seats, then I think there's stronger probabilities that you're going to see legislative legislation relating to, quickly, you'll see perhaps a $2 trillion additional stimulus bill. You're going to see infrastructure programs, and you're going to see clean energy programs. We think total spending under blue wave scenario could a mount t o as much as $7 trillion. How are we going to get there? It's going to be a combination, higher taxes and deficit spending, but that's the scenario we're seeing. So under a blue wave, I would expect the tariff issue. I mean, not to excuse me antitrust issues that we see going on in technology companies will continue perhaps be worse u nder Democrats. And t hey would be under R epublicans, w hich a re kind of w inning i n that way as well. And then I see that leadership changing in this market is going to come away from these tech companies that have done so well this year and more into b road-based cyclical and perhaps those value companies. So we're watching this very carefully, b ut the market right now is pricing in the effects of a blue wave.

Natalie Picha:

Okay. That's very good. Good thoughts. I think we also speak a lot about the sectors of the market, the ten, the 10, 11 sectors of the S and P 500. And I think clients often understand when we say , an energy sector or we're in the healthcare sector or financial sector. Can you speak a little bit to , and I know we talk about it often what sectors may or may not do well under each scenario, what we may be looking at overall, if you look at healthcare under the Obama administration versus healthcare under the Trump administration, what are your thoughts on that?

Glenn Royal:

Yeah, that's a great question. And so the being that we're in Houston, Texas, energy is near and dear to our hearts, right? We were all touch it one way or another. And the last night's third and final debate, the very final closing statement from the vice-president Biden. Was it going after the energy, he was going to switch to green energy, right? That's a little alarming, you know, to hear that, particularly at the close of the debate. I don't know if you want any Texas votes out of that, but that did come on. And so I , I look at that and I think, okay, how does that impact? So what we do know about bans proposals so far was that it would ban fracking on public lands, the issuance of new permits. There's not any talk about shutting down. Was there just the issuance of new permits? Let's talk about our energy portfolio. So we're there and know that energy.com air energy was 15% of the S and P 500. You had to own ExxonMobil, you have it, or you just didn't perform in the markets right today. Energy is less than 3% of the S and P 500. And we all know if we've all been locally, we probably have all watched ExxonMobil and kind of seen the horrors of that stock, right? But we're , we are in our energy, is we're in the Permian because the Permian is where it's at in United States. We own Chevron, Chevron, bought Noble. So what you have going on is these big, strong energy with these powerful balance sheets. They're buying out those second tier companies that have too much debt or having to go to the high yield market in order to create more financing and that shut down on them . So what's happening, they're being bought out. So here we are right now is a scenario where I think that if the bind administration comes in and we see that ban on fracking, what we've done is we've set up with Pioneer that just bought another in Parsley Engineering, just on parts of they've come together. And then we have Conoco that bought out Concho. So now you have two of the biggest pure plays in the Permian, and this is on private lands. So I am actually think you would be to our favor if there is a ban on issuance of permits for fracking on public lands, because that shuts all that down and we're in the sweet spot. So we do have a little bit of politicking going on in the energy space. Also, we're also seeing that the big majors have under-invested in production. That's why you're seeing some of this news, they're going into grab that in the Permian. And I can see potential for this supply disruptions later in the next year and increased pressure on energy prices. One of the other things that I think can happen under a democratic blue sweep as well is inflationary pressures that you may see for demand as we go for materials on infrastructure bills and all these others. So, which we haven't had since the seventies in 30 years, secular decline in interest rates has been driven by deflation. And now we're at a potential, are we seeing signs that spark inflation, knowing our fed is whipping those flames to try to get inflation back up. Probably I can see inflation running to 3% before the fed moves in and starts to try to do something about it. So it'll come from energy, commodities, and all this broad-based stimulus from central bankers and all that this going on is going to lift all assets. So there's, it's on the, you know, it's in the horizon, it's not upon the ship. It's something that we're really cautious about and it could be driven by that energy.

Natalie Picha:

Right. So there's always things to do, regardless of if it's a red or a blue administration.

Glenn Royal:

And it doesn't stop, it doesn't stop. And again, we're just analysts . We're going to manage money. Whoever's in that white house from , from either Democrat or Republican administration, either owning all three branches or being blocked by one branch. We'll still get through it.

Natalie Picha:

Right. It's about always looking at the landscape and looking for the opportunity.

Glenn Royal:

Some company is making money somewhere.

Natalie Picha:

Right. Exactly. Exactly. Well, thank you, Glenn. I really appreciate this. And looking forward to the next time we speak.

Disclosure:

Royal Harbor partners is registered investment advisor and the opinions expressed by Royal Harbor Partners on this show are their own. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented is for educational purposes only, and does not intend to make an offer or solicitation for the sale or purchase of any specific securities investment or investment strategies. Investments involve risk. And unless otherwise stated are not guaranteed. Information expressed does not take into account your specific situation or objectives and is not intended as a recommendations appropriate for any individual listeners are encouraged to seek advice from a qualified tax legal or investment advisor, determined whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Introduction
The 2020 Election Cycle
The Market Sectors
Disclosure Statement