A Democratic White House and Republican Congress would likely be net neutral for growth or produce a slight contraction. The TCJA could partially expire, with a higher effective corporate tax rate. Spending would probably grow slowly, with new tariffs unlikely. Under a Republican White House and Democratic Congress, the TCJA would likely partially expire, with more tax cuts unlikely, and spending should rise slowly. Tariffs are the wild card in this scenario: the heavier they are, the greater the drag on growth.
Investment Implications: Take the Cheap Option
What does all this means for investors? Our view is that it’s less about timing market entry or exit and more about managing portfolio allocations. In a sense, investors should overlay politics onto their fundamental views and look for cheap or free options.
Moderating but positive growth combined with falling inflation and rate cuts tends to produce support for risk assets. Given the historic levels of index concentration, we think return patterns could broaden out going forward. That creates the potential for active management to enhance returns.
We think the key is to focus on areas that are attractive from a macro perspective and would likely benefit from a change in leadership, with limited to no expected downside under the status quo. These include oil and gas, financial services, healthcare, and high-dividend or dividend-growth segments. For bonds, inflation protection seems sensible, as do select credit positions and capitalizing on a likely steepening yield curve.
In other words, target fundamentally attractive market segments likely to see a neutral, negligible or positive impact from potential post-election policies.
Energy: Playing the Field in the Transition
Let’s take a deeper dive into a couple of these areas, starting with the energy sector. Oil exploration was critical when the US struggled to expand production as a net energy importer. Thanks to shale oil’s emergence, the country has become the world’s largest oil producer and is nearly energy self-sufficient. Drilling today focuses more on economics than scrambling for resources. All told, we don’t think major oil producers’ plans will change much after the election.
On the renewable front, the Inflation Reduction Act (IRA) is a Democratic initiative but its job creation benefits traditionally Republican states. That creates bipartisan support to continue the legislation, though a change in White House leadership could bring changes to parts of the legislation.
The IRA catalyzed investment in alternative and clean energy, and Russia’s invasion of Ukraine added urgency to the drive to diversify away from fossil fuel reliance and toward energy sources that are climate-friendly, economically competitive, and domestically abundant.
The energy transition will continue to create winners and losers. Research and a discerning eye are prerequisites in a rising tide that’s lifting all boats. After all, some boats will be more seaworthy than others. Currently, areas like energy grid investment and electrical infrastructure seem to offer opportunities for effectively positioned firms.
Healthcare: Vast Scope and Complexity…but Opportunity
Healthcare is another sector that defies a straightforward assessment. At 17% of US GDP, it accounts for about $4.5 trillion in annual spending. Drug costs get a lot of airtime in legislative discussions, but hospital visits and physician fees drive a much larger amount of spending—from 50% to 80% of all healthcare costs.
Despite a substantial degree of tech-driven efficiency, healthcare costs have continued to rise—plagued by little price transparency and a lack of value-based payment systems. In some ways, the healthcare sector lacks a counterpart to the IRA as a catalyst for transformative investment. In this landscape, firms that demonstrate value and the ability to drive better outcomes should thrive.
In a policy-laden industry, some relatively insulated segments present exciting opportunities today. Robotics in surgery, for example, have enabled more precise and less invasive procedures. Advances in genetic therapy, gene editing and stem cell therapy are driving innovation. Then there’s the influence of tech in healthcare: given its potential to drive efficiency, we think it’s poised for growth.
