Elections Impact on Portfolio: Historical Trends and Market Analysis

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Historical moves around elections, market behavior during election years, and the correlation between elections and recessions. Gain insights into electoral votes, Congress dynamics, and potential market winners and losers post-election.

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The Briefing Trader Election Playbook PRESENTER: Gavin Maguire, Senior Equity Analyst EventTrader (EVENT)

Introduction Looking at the elections and the impact on your portfolio. Historical moves around elections Candidates and the Platforms Verticals Plays Gavin Maguire - EventTrader (EVENT)

Markets During Election Years Generally speaking stocks struggle in 1H of the year due to uncertainty Markets usually find a bottom once a clear cut winner emerges. 2016 has seen some similarities but is trading to the economy, global issues, and monetary policy. One pattern that did stick out- The three month return in markets ahead of the election has predicted 19 of the 22 outcomes since 1928 (S&P at 2174 on August 1). Gavin Maguire - EventTrader (EVENT)

Elections and Recessions There have been 14 recessions since 1928 11 (79%) have started after elections Median avg 8 months Mean 8.4 months Dow Jones has ended higher in 15 of last 21 Presidential terms (Dec after election thru Nov of election). Three of the six declines include Hoover (Great Depression), Carter (Oil Crisis), Bush 43 (Great Recession). Gavin Maguire - EventTrader (EVENT)

Electoral Votes 270 Electoral Votes are needed and Clinton has an easier path (FiveThirtyEight gives Clinton 82.9% chance of winning) Trump needs to carry more battleground states: FL, PA, OH, GA, NC, VA, WI, CO, NV, IA, AZ, NH. Ohio- Last Democrat to win w/ out is JFK; No Republican has won w/out it (Trump is up ~2 points, Clinton 59%). Florida- Last Republican to win w/out was Calvin Coolidge (Clinton up ~3 points, 70%). Pennsylvania- Clinton has a 12 point lead (86%). Gavin Maguire - EventTrader (EVENT)

Congress Senate- Thinking is that the president elect s party could take Senate. Democrats need to take 6 seats to gain control; 10 Dem seats, 24 Rep seats (FiveThirtyEights have Democrats at 52.6%); Key states AZ, FL, IL, MO, NV, NH, NC, OH, PA. Congress- Likely to stay in Republican control Democrats need to take 30 seats. Baseline scenario is for a balanced outcome that maintains current split in power. Gavin Maguire - EventTrader (EVENT)

Trump- Winners and Losers Major Winners- Oil & Gas, Aerospace & Defense, Materials, Domestic Manufacturing, Multinationals, Coal, Volatility. Minor Winners- Pharma/Biotech, Medical Devices, Utilities, Financials, REITs Minor Losers- Housing, Muni Bonds Major Losers- Consumer Staples, Healtchare Providers. Gavin Maguire - EventTrader (EVENT)

Clinton- Winners and Losers Major Winners- Solar, Wind, Materials, Healthcare Facilities & Services Minor Winners- Technical & Telecom, Consumer Staples, Aerospace & Defense Minor Losers- Consumer Discretionary, Oil & Gas, MLPs, Student Lenders, Prison Operators, Big Banks Major Losers- Coal, Pharma, Restaurants Gavin Maguire - EventTrader (EVENT)

Infrastructure Clinton Proposed spending ~$1.55 trl over 10-years, financed through taxes on the wealthy and corporations. Focused on highways, public transit, airports and green energy. Has talked about affordable broadband in every house by 2020. Trump Proposed spending ~$1 trl and reducing spending which leaves the spending gap to be largely financed through Treasury debt. Method of increasing debt could weigh on the dollar and bonds. Cut in taxes and increased spending could steepen yield curve. Gavin Maguire - EventTrader (EVENT)

Capital Gains Taxes - Clinton Clinton Increase Federal Capital Gains taxes with a marginal rate of 47.4% After two years of holding investments the rate would decrease. The lowest rate of 20% would be hit on a 6-year hold (currently 1 year). Would likely reduce liquidity. Trump Has not released full details but expectations are for him to lower the rate on capital gains. Would repeal the 3.8% surcharge for the Affordable Care Act. Short-term capital gains taxed at lower margins. Gavin Maguire - EventTrader (EVENT)

Capital Gains- Tax-related Selling Democrats wins- Would likely increase selling to lock in winners. Republicans- Would likely delay selling to capture lower tax rates. Momentum stocks kept under Trump plan, Value Stocks kept under Clinton plan. Gavin Maguire - EventTrader (EVENT)

Corporate Taxes Clinton No plans to change the corporate tax rate. Marginal corporate tax rate is 39; Effective tax rate is 27% after deductions. Stop further tax inversion. Negative for multinationals with big overseas operations. Corporate Taxes are ~10% of revenue and less than 2% of GDP (Individual taxes much higher part of Fed revenue) Trump Trump would lower the corporate tax rate to 15% from 35% (President Obama has called for it to be lowered to 27%). Trump would eliminate loopholes and tax exemptions but he has not clearly stated what changes would occur. One time repatriation of 10% of earnings and end deferrals of taxes on foreign owned holdings (Obvious boost for multinationals like AAPL, GOOGL) Gavin Maguire - EventTrader (EVENT)

Trade Trump has used anti-trade as a pillar of his campaign and promises to rip up the Trans-Pacific Partnership and NAFTA. Clinton has been supportive of global trade in the past (Supported TPP and Bill Clinton created NAFTA) but took up the anti-trade platform following Bernie Sander s success in the primary. NAFTA is Mexico and Canada. TPP is 12 pacific rim countries and also includes Canada and Mexico. Both candidates have said they would take a tougher stance on China (FXI). Gavin Maguire - EventTrader (EVENT)

Trade Contd Free trade has increased competition and lowered prices, so a move away could prove to be inflationary (Bonds, Gold). Gold could see interest as a potential alternative currency used in trade. Export reliant, particularly Emerging Markets would be hurt (EWW, EWC, EEM). Three largest trading partners are China (FXI), Canada (EWC), Mexico (EWW) which make up ~45% of U.S. export and imports. Aircraft, Auto, Soybeans, Industrial Machines, Computers and Semiconductors were 49% of U.S. exports to China in 2015. Gavin Maguire - EventTrader (EVENT)

Trade Contd Aerospace Largest export industry (gross exports $119 bln in 2015). Asia Pacific has about 1/3 of global travel. China could respond with its own tariffs (13% of exports) Auto China exports no cars to U.S. but imports ~$19 bln. GM has ~$2 bln in earnings thru JVs, F has ~ $1.5 bln. Suppliers have built presence in Mexico. Potential negative for ABS transactions (SC). Arguably the biggest impact given move to regionalize production. Gavin Maguire - EventTrader (EVENT)

Trade Contd Oil U.S. Imports ~ $60 bln (33%) from Canada and $14 bln (8%) from Mexico. U.S. Exports to Canada were $17 bln (6%) and $16 bln (7%) to Mexico. Refiners and Producers could see reduced demand. Basic Industries Chemical Industry could see a negative affect as could be targeted by China. Positive for steel producers (X, AKS, NUE, STLD). Technology Global supply chain has moved over to Asia over the past two decade so potential for increase in costs would be negative. Gavin Maguire - EventTrader (EVENT)

Financials Clinton Increase regulations with full implementation of Dodd Frank and strengthen Volcker Rule; Increase regulation on shadow banking. Charge a risk fee for excessive leverage and short-term borrowings in order to reduce risk. Limit executive bonus. Trump Would like to halt Dodd Frank (~70% has been implemented, 9% published rules, 20% unproposed) Has hinted at calls to reinstate Glass-Steagall. Gavin Maguire - EventTrader (EVENT)

Healthcare Clinton Expand access to Affordable Care Act (Obamcare) Support insurance tax credits, cap on premiums and deductibles Expand Medicaid (Lower age to 55 from 65) Push for lower drug prices. Creation of public insurance provider. Trump Repeal ACA; replace with a market-base system. Remove barriers on interstate insurance. Allow purchase of high deductible healthcare savings plans. Deductible of insurance premiums for personal income tax Gavin Maguire - EventTrader (EVENT)

Healthcare - Insurers Trump positive; Clinton Negative Insurers have incurred losses from ACA (some insurers have pulled out of areas). Expansion of Medicaid could have employees pushed out of company plans (less revenue for insurers) Reducing out of pocket expense would pressure insurers ability to control costs and pricing. Under repeal insurers could see a flood of members seeking healthcare before terminated (tough Q4). Gavin Maguire - EventTrader (EVENT)

Healthcare - Service Providers Providers Acute Hospital Care Providers have been winners under ACA (Reduction of bad debt expense). Change to Medicaid block grant negative for Providers (especially Nursing Facilities). Expansion of Medicaid could hurt providers as it pays less than insurers. Number of uninsured rising impacts bad debt expense. Medical Devices Clinton win would be viewed as a positive as Healthcare Providers are biggest customers. Impact if ACA repealed not totally clear. Consolidated Appropriations Act had a two year moratorium on medical device excise tax (2.3%). Expected to be reinstated to fund ACA. Gavin Maguire - EventTrader (EVENT)

Healthcare - Pharma Has faced the highest costs from ACA: Industry fee. High rebates for Medicaid beneficiaries. Discount for Medicare Part D plans. Both have discussed removing barriers to import drugs from foreign companies that can be produced at lower costs (NVS, RHHBY, SNY, GSK, AZN, TKPPY). CMBS would be impacted if Pharma companies revenues hurt and rent slides. Gavin Maguire - EventTrader (EVENT)

Plays Aerospace/Defense- XLI (ETF), BA, GD, HON, LLL, LMT, NOC, RTN, COL, UTX, AYR, FLY. Auto- GM, F, SC. Industrials- CSL, ROP, HON, MMM, GE, PHG, RAVN. Semiconductors- ADI, INTC, MU, NVDA, QCOM, SWKS, TXN, XLNX. Gavin Maguire - EventTrader (EVENT)

Plays Steel- X, NUE, STLD, AKS. Oil Refiners- VLO, TSO, HFC, MPC, WNR, PSX, MRO, HES, CRAK (ETF). Chemicals- DD/DOW, CF, MOS, SYT, SNP, BASFY. Healthcare Insurers- ANTM, CI, AET, HUM, UNH. Gavin Maguire - EventTrader (EVENT)

Plays Healthcare Service Providers- IHF (ETF), THC, ATHN, HLS, CYH, CCM, UHS, SEM, SSY, AMSG, ECHC. Nursing- CTRE (ETF), HCP, OHI. Medical Devices- ICUI, STAA, JNJ, CAH, MDT, BSX, ABT, STJ. Pharma- VRX, MNK, MYL, PFE, MRK, GILD, ABBV, TEVA, LLY, AMGN, BMY. Gavin Maguire - EventTrader (EVENT)

Plays Coal- KOL (ETF), BTU, CLD, ARCH, CNX, VALE, ACIIQ, WLB. Alt Energy- FSLR, SPWR, CSIQ, CLNE, SPWR, SEDG, CREE, VWDRY. Financials- JPM, GS, C, BAC, WFC, MS, KRE (ETF), XLF (ETF). Infrastructure- PWR, EME, FIX, DY, IESC, CAT, CMI, PH, ACM, AGX, NVEE, JEC, FCX. Gavin Maguire - EventTrader (EVENT)

Clinton Basket Long Aerospace/Defense: BA, LNT, COL Industrials: ROP, GE, GVA, AGX, ACM, NVEE, JEC, PWR Semis: SWKS, MU Healthcare: AET, IHF, UHS, CTRS, ABT Alt Energy: FSLR, CLNE, CREE, IESC Bonds: BBN Telecom: DY Shorts Tax Selling: NVDA, XLNX, NXPI Insurers: ANTM, CI Private Jailers: GEO, CXW Gavin Maguire - EventTrader (EVENT)

Trump Basket Long Aerospace/Defense: NOC, LLL, LMT, GD, HON Industrials: ROP, GE, GVA, AGX, ACM, NVEE, JEC, CX Healthcare: JNJ, ANTM, CI, UNH, VRX, MNK, GILD Energy: XOM, KOL, HAL, DUK Steel: X, NUE, STLD Private Jailers: GEO Volatility: VIX, UVXY Shorts Trade: BA, UTX, Auto: GM, TM, F Gavin Maguire - EventTrader (EVENT)

Feedback or Questions Direct: gmaguire@briefing.com Or you can send the whole Trader team a message at: briefingtrader@briefing.com Or use the Talk To Us feature (if you want a reply, make sure to leave your own email address):