First, it does my heart good to see the reminders on television and in the news of the horrific memories of September 11, 2001. Despite the awful destruction done on that day, it was a time that the nation came together, and for a while all else was forgotten as we saw the greatness of the Americans that worked together to piece together the families that were torn apart. Collectively, we said ‘Never forget’…and we haven’t. It was just yesterday and yet it was so long ago. The babies born on 9/11 will be voting this year.

I’d like to cover a bit of our thinking on what the investment world will look like after the next election.  Big picture first: If the Dems win the Presidency AND the Senate the public’s fear will be ‘here comes socialism’. But remember that we had that situation under Obama.  Public outcry may prevent a massive tax hike, but taxes will certainly increase. On this morning’s news I heard Biden say that a corporate tax increase is on his radar for day #1 of his Presidency. And regulations will increase. But will the country go out of business? Not likely. Market multiples will likely come down, but volatility will probably not be anything like it was in March. Many US Companies, however, are more profitable than they have ever been, and this is likely to continue.

On the other hand, if the Presidency goes to the Dems and the Reps maintain the senate, it will most likely be gridlock much like today, with less to worry about.

And finally, if there is the Republican sweep, we can expect continued reduction of regulations, a further reduction in taxes, and general promotion of growth policies.

More specifically, although I certainly have my political preferences, my first job is to look at what IS, not what I’d like it to be. I remember that many investors clung to their ideology and avoided the US markets when Trump won in 2016. They missed out on some amazing market gains. With that in mind (and hopefully not much bias) here are the areas we’re considering as we look forward to which areas of the investment world are likely to be impacted by the choices that are made in November.

A Biden win would most likely give us a sluggish market in 2021. Corporate taxes would immediately go up, and taxes take more cash flow away from profitable companies. Valuations would be negatively affected. Companies with primarily US-based cash flows would likely fare less well than companies with global cash flows. Large-caps with global reach will likely be less affected than smaller companies as most of their revenues are domestic. So, in 2021 companies would have to absorb the tax increases, and this would likely give us a soft market. Later on, in 2022 and after, perhaps less of a concern. That’s too far ahead to project. (Five-year plans only work if they’re updated every year). For now, we’re looking at areas of the small-cap world that appear promising.

Some specific sectors: A strong Democrat win would hammer the energy sector. Think the green new deal and promises of decarbonizing the US. Some of this could be done with the stroke of a pen reversing the gains to US energy independence that have been done. This is probably an area we would strive to avoid. Renewable or green energy, on the other hand would be a potential growth arena. Defense companies would probably lose steam, and in a slowing economy consumer staples would probably be better than more aggressive areas. Government bonds typically do well in a soft economy and government bond prices typically rise. We would look to avoid consumer finance since more regulations would negatively impact finance companies.

Dems have suggested that they would work to make cannabis a schedule 2 drug (it’s a schedule 1 drug now). This would open up the world a lot for cannabis-related investments as it would provide access to domestic capital to support the industry, especially in states where it is decriminalized.

Higher taxes mean that municipal bonds would likely see more incoming cash flows, so we would need to consider them again as part of our bond portfolios. Trump has resisted sending more money to the states, but a Biden win probably would send more money to states, improving their balance sheets and the quality of the muni bonds.

A strong Trump victory would look very different in the investment world. We would look to overweight defense stocks as they would likely be a big winner. Oil and gas would do well as they wouldn’t likely be re-regulated. (Trump feels that American energy independence is a big win for him.) Smaller companies (small-caps) should do especially well, and with more deregulations and tax-cutting the expected higher growth would favor higher beta (more aggressive) stocks. We would likely look at shifting from larger companies to smaller ones.

We would expect that under either scenario 5G will continue to look good. Both parties feel that the West should have its own 5G capabilities, infrastructure and software. Also, this would be a good diversion away from today’s big-winning Fang stocks. US Infrastructure spending is also favored by both parties so we like that as well. And a recovering economy is likely to give impetus to putting people to work rebuilding the US roads and bridges, especially with the current low cost of capital.

With either party in charge, we are likely to see more of an assault on pharma, biotech, and hospitals. Congress seems to think that those areas have companies that are getting too big and need to be taken down a notch.

Finally, a strong Trump win would likely mean more of the emphasis on the areas we’ve seen in the past three years. More deregulation, lower taxes, and emphasis on the companies that create growth.

In any case, what we have written here lets you into our current thinking, and highlights some of the areas we are investigating in an effort to have the ammunition ready to redirect client portfolios toward the most profitable areas after November.

Ron’s Market Minute — Bulls Take a Rest

 After a three-day pummeling of the tech leaders — brought on by some extreme overbought conditions and exuberant optimism — traders got the expected bounce on Wednesday. That rally quickly failed and on Thursday investors went home, perhaps more than a bit concerned.  The question on their minds was whether the selling was over or whether the correction had more room to run. 

Obviously today gives us a bit better picture. The big gorilla, the S&P 500 Index* is now oversold. This doesn’t throw the weight all to the bulls, but it lessens’ the bear’s strength.

Let’s remember that the current pullback of about 7% on the S&P qualifies as a ‘normal’ correction. And as I mentioned earlier, it seems justified. After all, it’s been almost straight up since mid-March. The question now,  will anxieties over unemployment, recovery, COVID, taxes, and additional stimulus get hold of the consensus? If so, the correction will most likely continue for a while.

However, my bottom line is that I believe we are having a well-deserved consolidation in the context of an ongoing cyclical bull market. The bulls needed a rest, as they had gotten ahead of themselves. 

And that’s my take.  (for now, anyway). This year is far from over.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

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Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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