Smartest Guys In The Room Tell You Where To Invest Ahead Of Election

There’s an election coming up. Did you notice? Apparently you didn’t:

(Chart: Goldman)

As you can see from the above, we’re well below the median (in fact we’re below the 25 percentile) when it comes to equity market uncertainty ahead of a US presidential election. Which is of course curious considering headlines like this:

 

As we discussed in our special report “The Next Big Short,” this election is a seminal event with the potential to forever change the course of US politics. Donald Trump’s candidacy has changed the way we think about the political process - who can run, who can win, and who can play to the fears of an electorate rattled by uneven economic growth, a recession still fresh in the minds of those who lost their retirement savings, and perhaps above all, the seemingly constant threat of terrorism.

 

Be that as it may, the market is shrugging its shoulders - we’re damn near an 11-handle again on the VIX:

Of course some of this is tied to the continual injection of liquidity from central banks:

(Charts: Citi)

How could you not be a buyer? You’ve got a “greater fool” - so to speak - with a money printing machine ready to buy higher.

Still, you’re staring down the possibility of a looming trade war (both candidates have suggested a kind of step back from globalization) and an extraordinarily uncertain geopolitical environment in the event of a Trump White House.

We’re reasonably confident that you can expect vol to pick up from here - especially if next week’s first debate turns out to be a circus.

So what should you do? Well, if you’re inclined to stay invested and aren’t one for trading vol, you might want to consider stocks that will benefit from government (i.e. fiscal) spending. Here’s Goldman:

“We recommend investors focus on a basket of companies with the highest US government revenue exposure, which should benefit most from an expansion of fiscal spending. The basket (ticker: GSRHGOVT) has risen 11%YTD, outperforming the S&P 500 by more than 400 bp, but carries a 11% P/E discount to the broad market (16x vs. 18x). The newly-rebalanced basket contains 64 stocks with at least 20% of revenues tied to government spending. It includes 14 stocks specifically from the Aerospace & Defense industry, which also has outperformed the S&P 500 YTD and will likely receive a revenue boost regardless of who wins the election. In addition to the broad GSRHGOVT basket, the Aerospace and Defense industry can be tracked independently using the ticker GSSIAERO. Note that the government exposure basket also includes many Health Care stocks, some of which may face industry-specific policy risks as discussed below. See Exhibit 3 for Buyrated stocks in each of these groups.”

(Table: Goldman)

As for the protectionism banter from both sides, Goldman of course recommends you focus on firms that derive a significant portion of revenues domestically:

“Protectionist rhetoric from both candidates supports our ongoing recommendation to own US stocks with high domestic sales (GSTHAINT). We expect that healthy US growth and a tighter Fed than the market expects will support US dollar appreciation during the next 12 months, which will fuel the outperformance of the most domestic-facing US firms relative to those with large international sales (GSTHINTL). Domestic sales companies trade at a 19% P/E discount relative to international sales firms (16x vs. 20x). The risk to exporters from a new president who wants to renegotiate trade deals, as suggested by both candidates, should also support firms with concentrated US sales, as would potential tax reform punishing companies that currently take advantage of foreign operations to lower their effective tax rates.”

(Table: Goldman)

So there you go. Don’t say Goldman didn’t try to help you.

But if you, like many market participants, take Goldman as a contrarian indicator, you may just want to do the opposite of everything said above.

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