Which segments of the equity market face the most uncertainty prior to the 2020 election?
This question is always a wildcard so far in advance, but it will likely depend on the ultimate Democratic front-runner. With the slippage of Joe Biden in the polls in favor of a rising Elizabeth Warren, there are already a few hot button issues that have affected sentiment. Biden has been depicted as a ‘working-class’ advocate, more aligned to the traditional Democratic policy platform, while Warren’s views have tilted further towards the left, nearly to the degree of candidate Bernie Sanders in 2016. This is especially true in the consumer protection arena, where she has served in unique governmental roles.
One of the largest areas of focus is health care. The promotion of ‘Medicare for All’-type plan or other discussions about a single-payer solution has increased volatility in the segment. It comes down to who the ‘winners’ and ‘losers’ might be if the current complex medical system is changed, and how that affects profitability (or even the continued viability of business models in some sub-sectors, such as drug distribution). For blue-chip pharma companies and even smaller biotech manufacturers, the primary focus is their drug pipeline and revenues, and, specifically, how changes to the system could trim payments to manufacturers (as is already seen in other parts of the world).
The classic argument made by big pharma is that the wide profit margins on new products are required to fund research and development for new drugs, and, without those proceeds, the new innovations can’t happen. This debate has been in place for decades, with little having changed, other than some of the more egregious drug price increases in recent years having been pulled back in light of the political and public backlash. The current litigation regarding Opioids and who is to blame for their over-prescription is another to-be-determined factor that could take on more political importance. (A variety of municipalities are already involved in potential litigation with Opioid makers and distributors.) While it could seem odd to blame manufacturers of a drug for its misuse, the growing pervasiveness of abuse and social and economic effects may raise the statute of this as a political issue.
Financial stocks are another target of possible re-regulation. This had been done once, by Dodd-Frank legislation following the financial crisis, so there appears to be less to do here. However, Warren’s background as a consumer advocate could threaten a strengthening of such protections, which may end up being more burdensome for banks on the compliance side, or threaten profits for firms, such as those involved in credit cards and other consumer lendings—notably those seen as predatory to lower-income borrowers. In an appeal to younger voters, possible solutions to the growing student loan problem, such as partial forgiveness, interest rate caps, or other regulations, could also be considered anti-lender.
Technology and communications services have also been targets, interestingly from both political parties. Privacy concerns with larger technology and social media firms have pushed some to call for a breakup of these companies (to erode their oligopoly-like status), or at least EU-style regulations on the use of personal data (GDPR). This has seemed to pick up steam in the wake of the growing number of large data breaches. While it lies the shadows, data has become big business and represents a financial commodity bought and sold for marketing purposes, so is a monetized component in company earnings. Restricting its use could naturally affect these firms negatively. Peripheral technology companies such as Amazon, which is technically in the consumer sector, could face growing scrutiny for accusations of anti-competitive practices for dealings with smaller competitors on its platform. This is a more difficult argument compared to times past, as this has recently resulted in lower consumer prices, as opposed to higher.
In other sectors, energy and materials could face greater examination under a Democratic administration, and certainly tighter environment controls—in contrast to those loosened in recent years under the Trump administration. Tighter restrictions on commodity extraction and production, such as pipelines and fracking, typically mean less flexibility when responding to market changes, so greater volatility in profits.
More broadly, a new administration and change in composition toward Democratic control could ratchet up the possibility of rolling back recent tax law changes. It’s been argued (including by some in corporate America), that tax cuts were taken a little too far, so at least a partial repeal and movement in tax rates upward a bit would put a dent in corporate earnings immediately across the board. Of course, a new administration could also affect the pace and rhetoric of the current U.S.-China trade/tariff debate for better or worse. This affects a variety of sectors, including industrials and consumer goods, among others indirectly, due to intertwined supply chain linkages. While an issue with long-term ramifications, markets do tend to penalize the addition of uncertainty but also reward the removal of uncertainty in the near term.
As you can see, none of these issues are new and have been raised in many of the Presidential elections of recent decades. If they were easy to solve, they probably would have been already.