This week was, like last week, mostly about the Fed and about oil. Friday isn’t set to be any different as Janet Yellen will have what’s being billed as a “discussion” with Harvard econ professor Greg Mankiw at 1:15 ET.
In a nod to central bank humility, the professor and the chair will talk “about Yellen’s groundbreaking achievements.” She’ll also be getting a medal. It blows the mind and not so much because accomplished academics shouldn’t get medals or talk about their success, but more because this ceremony demonstrates a complete lack of regard for the precariousness of the prevailing circumstances.
And speaking of precarious circumstances and things that blow the mind, something else big happened this week besides Fed pontificating and Brent hitting $50. Donald Trump secured the Republican nomination when ABC and others projected he had topped the magic 1,237 number needed to lock up the GOP nod.
This was, quite frankly, a laughable proposition late in the summer of 2015. Then it transitioned from laughable to still unthinkable. And then, once the primaries began, it quickly became apparent that there was indeed a path for Trump to prevail. Once Ted Cruz threw in the towel, it was obviously over.
Now, investors want to know one thing: what does this mean for equities.
After all, Trump isn’t exactly your run-of-the-mill GOP candidate. On top of that, there’s some uncertainty surrounding Hillary Clinton as well. She has adopted much of Bernie Sanders’ “tough on Wall Street” rhetoric and, perhaps thanks to her ties to BlackRock via long-time adviser Cheryl Mills, she’s also suggested she’ll move to curtail the type of balance sheet engineering that’s allowed corporate America to pursue bottom line beats (i.e. short-term, share price inflating maneuvers) at the expense of long-term competitiveness and the preservation of enduring shareholder value. Clinton calls it the “tyranny of the next earnings report.”
For a detailed rundown of the outlook for fiscal and other policies under the two candidates, you can read what I wrote earlier this month, but I wanted to narrow the focus a bit to equity markets because, i) that’s what you probably care about at the end of the day if you’re a trader, and ii) it seems particularly timely now that Trump has secured the nomination on the Republican side.
As I’ve jokingly remarked in the past, if there’s anyone who knows a thing or two about Hillary Clinton, it’s Goldman Sachs. After all, they’ve made over $800,000 in campaign donations to her political endeavors over the years and they’ve also paid her hundreds of thousands of dollars for speaking engagements.
If you follow sellside desks you’re likely familiar with Goldman’s chief equity strategist David Kostin. In a note out late this month, Kostin and company begin by observing that due to the polarization of American politics, this election will likely be far closer than many observers assume. This is consistent with the latest research from Citi’s vaunted credit strategist Matt King, who recently documented how polarization affects politics, economics, and markets. Here’s a graphic from Citi which illustrates this point from a political perspective:
(Chart: Citi)
“Although prediction markets currently assign a high probability that Hillary Clinton will win the election, polls in prior contests tightened as voting day approached [and] Increasing political uncertainty will lift equity market uncertainty in coming months,” Goldman begins, adding that “from a portfolio strategy perspective, protectionism and tax policy are two areas of debate that have investment implications.”
Although the bank notes that a measure of equity market uncertainty around US elections is currently tracking very low on a historic basis, that will likely soon change:
(Chart: Goldman Sachs)
Ok, so what about positioning? Well, as far as rising uncertainty is concerned, there are of course consumer staples…
(Chart: Goldman Sachs)
But don’t forget that there’s also likely to be a more protectionist lean when it comes to trade no matter who wins (although obviously more so with Trump). That means you want firms with outsized US sales. Here’s Goldman one more time:
“Stocks with high US sales will outperform firms with foreign sales. Our sector-neutral basket of 50 stocks with 100% US sales (GSTHAINT) will outperform our corresponding basket of stocks with 72% non-US revenues (GSTHINTL). The long US sales/short foreign sales trade benefits from a strengthening US Dollar, which explains why the strategy has returned -350 bp YTD as our basket of high US sales (-1.3%) has trailed our foreign sales basket (+2.2%).”
(Chart: Goldman Sachs)
The cynical among you will note that Goldman has a reputation for recommending what they themselves want to sell you, but the above is based more around historical price movements and the policies as outlined by the candidates themselves, so the chance of getting “muppetized” here is probably greatly reduced.
Coming full circle to where we began (i.e. with Janet Yellen), I’ll close with an amusing quote from Larry Weiss, head of U.S. trading in New York at brokerage Instinet who spoke to Bloomberg this week:
"It’s unusual and potentially dangerous for the Fed chair to speak on a day when markets are expected to be so quiet and thinly traded. Any market effect from her comments can be greatly exaggerated based on the lack of natural liquidity.”
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