The Perils of Picking Policy ‘Winners’

Election season is frequently wild and unpredictable. But one entry on the BINGO card gets reliably ticked off every time: pundits’ hyping of a given candidate’s supposed stock market winners and losers. In 2016, it was all about the Trump Trade. Four years later, it was nonstop Biden Stocks. This time around, we have already seen a fair amount of Trump Trade chatter and Harris … well, no alliteration yet, but you get the gist. Not only do we think this is premature, but the notion of Trump Trades, Biden Stocks and now Harris … we guess Harris Hits … always missed the mark.

Elections do affect markets, and we will get there momentarily. But it isn’t about identifying the winner and the sectors and industries likeliest to thrive under them. One, the presumed winners and losers tend to be based on bias and campaign rhetoric, which may differ wildly from policies pursued in office (whose success rests on Congress passing legislation). Two, while policy matters, global supply and demand trends often swamp local industrial policy and regulatory chatter. And three, it is all so widely discussed and traded on that markets price it well before the winner takes office. Markets move most on surprises. Alleged Trump Stocks and Harris Hits don’t qualify.

The earlier Trump and current Biden administrations bear this out. In 2016, when Trump won, headlines claimed his presidency would boost Energy and Industrials stocks bigly thanks to his campaign emphasis on fossil fuels and defense spending. But that viewpoint didn’t work out so hot. During his administration, Energy was the S&P 500’s only negative sector, down -29.5% cumulatively.^[i] Industrials was positive, up 49.1%, but it lagged the S&P 500’s 81.4%.^[ii] Even over a shorter span—the year after inauguration—both sectors lagged. Now, the Aerospace and Defense industry led in the first year, but lagged over the full four years.^[iii]

Similarly, when Biden moved into the White House, it supposedly meant dark days for Energy, high times for Industrials due to all the infrastructure spending he championed, and sunlit uplands for all things green. And yet, in the year after his inauguration, Energy led markets, rising 56.0%, Industrials lagged slightly (17.8% versus the S&P 500’s 21.0%) and green energy, which lives in a small nook in the Utilities sector, was down -15.8%.^[iv] Even the S&P Global Clean Energy Index, a broader measure including overseas firms, was down.^[v]

In the three-plus years through Wednesday, all those trends held. Energy is up a whopping 134.4%.^[vi] Industrials thus far are close to their performance under Trump, at 44.4%, which is in line with the S&P 500’s 44.5%.^[vii] Green energy is down -33.1% during the Biden administration … after soaring 217.6% under Trump.^[viii]

So today, as people speculate a second Trump administration would boost Energy, Health Care and industries benefiting from high tariffs and a weak dollar—while perhaps hurting Tech with a chip trade war—we suggest holding your horses. Same goes for talk that Harris might be a surprising Energy boost, given her recent endorsement of fracking, as well as positive for clean energy and Health Care. Both narratives overrate polling and rhetoric, and markets are pre-pricing all the chatter. Stocks will ultimately move on the gap between expectations and actual reality, both at a market-wide and industry-specific level.

This is the real thing to watch when it comes to assessing the election’s impact. For the election year, we have a long history of stocks delivering strong, back-end-loaded returns as uncertainty falls and markets rally on simply having a winner. In the inaugural year, returns tend to hinge on whether investors’ expectations are too hot or too cold. If folks broadly fear an overactive government disrupting property rights, but gridlock results in far less legislation than feared, then this generally tends to be more bullish. If folks broadly cheer some massively free-market and pro-business government boosting the economy and markets, and gridlock results in the new administration doing far less than hoped, then it is a potential risk.

We aren’t saying either scenario is likelier than the other for now. It will hinge on the White House winner as well as Congressional results—and on the hopes and fears the results inspire. It is an important topic, but one for another day.