Trump v. Clinton: the implications for equities

The wait is almost over! On 8 November, this crazy campaign will end, and the world will know America's next president. How will markets respond?

First, know: markets don't care about personalities, party, ideology, rants, tweets, insults and scandals. That's sociology and media circus. Stocks tune out the noise and move most on the gap between expectations - what people fear or hope the new president will do - and what he or she actually does.

While the odds favor a Clinton win, nothing is certain in a race like this. Best, then, to think about both potential outcomes.

For decades, stocks have followed a general election pattern. When Democrats win, returns are usually mild in the election year and big the next year - averaging 7.4% and 16.2%, respectively.

Republicans always sound pro-businesses but disappoint when they moderate or do littleWhen Republicans win, it's the opposite: strong election-year returns, averaging 15.5%, and milder gains the next (just 0.7% on average).

Why is always harder to know than what, but I think it's tied to markets' perception of campaign pledges. Democrats typically spout an anti-business agenda, scaring investors.

Once in office, they moderate or encounter gridlock. Stocks realize things won't be as bad as feared and rise in relief. Republicans, meanwhile, always sound pro-businesses, cheering investors at first, then disappointing when they, too, moderate or do little. Politics are only one market driver, but that is the history.

2016 could twist it

2016 could twist it. If Clinton wins, her anti-business rhetoric should prompt the Democratic norm - small gains in 2016, bigger next year. But if Trump wins, markets probably see him as they would a Democrat. He's more feared in a business sense than traditional Republican candidates.

Much of the Republican firmament is against him, from Congressional leaders to normally-sympathetic newspapers. No Fortune 100 CEO has endorsed his campaign. People perceive his anti-trade agenda as bad for the economy. Fear, everywhere, muting stocks year-to-date.

But next year, the reality of a do-little Trump or Clinton should boost returns. Most major initiatives require legislation. Gridlock likely blocks most big new laws. If Clinton wins, she might get a tiny Democratic majority, but not enough to do anything major. Lawmakers will be too worried about re-election in 2018 and won't want to rock the boat.

Next year's political surprise should be the new president not being a legislative disasterIf Trump wins and the Republicans keep Congress, about 20% of Republican lawmakers won't support him - intraparty gridlock.

Ronald Reagan once said the most capable presidents might get two or three things done. They talk a lot! But they accomplish very little on signature issues. Hence whatever markets fear from either candidate, reality is probably milder.

Any new laws will likely be heavily watered down from campaign proposals - they'll have to be, to get through a tight Congress. So to the extent any are bad, they should be less bad than people fear.

Markets move most on the gap between reality and expectations - in other words, surprises.

Next year's political surprise should be the new president not being a legislative disaster. A happy surprise for markets! Hence, whether Trump or Clinton wins, political winds should favour stocks in 2017.

Don't be scared away

So don't let Trump-phobia or anti-Clintonism scare you away from stocks. The more markets hate them now, the more likely 2017 is up big. Other forces will matter, too, but US politics should be one powerful positive. Buy now, before markets start fathoming the bullish broken campaign promises. Here are two for your shopping list:

As Tesla's halo now tarnishes, that should help brighten the status of Daimler. DAI deserves fatter valuations anyway. Why? Executing well! New models well received! Unit volume rising! Its only real risks are in truck sales. It's worth more than eight times my 2017 earnings estimate, 40% of sales and 5.2% dividend yield.

I usually skip truckers - too commodity-like - but I love short-sellers (when they're heavily underwater), since someday they must buy all that stock back.

By my reckoning, Swift Transportation, America's largest truckload carrier, has one of the highest ratios of short-sellers underwater extant, about 30% of its trading shares.

While a bit more levered than I'd like, it's well-managed, viewed wrongly as a play on an imploding economy and should earn $1.70 next year. Buy it.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.