As election results pour in on the evening of Nov. 3 and into the early morning of Nov. 4, when the initial vote counts will be somewhat tallied, there will be great consternation in the markets about the winning and losing sectors based on the potential outcome for the Senate and the White House.
I am assuming the House of Representatives will remain under the control of the Democrats, as many other prognosticators also expect. A Democratic sweep will fuel perception of major policy changes and a big progressive shift, affecting health care, energy, defense, banking, trade, immigration and foreign affairs, among other areas.
Early estimates have a blue sweep of Democrats controlling the White House and Congress resulting in only slightly higher spending than a Trump administration in terms of percentage of gross domestic product (GDP) going out to 2030. But the composition of the proposed spending mix varies greatly.
The non-partisan, non-profit Committee for a Responsible Federal Budget (CRFB) is running three models to forecast future spending — a low estimate, central estimate and high estimate. Using the central model as a template, the CRFB shows where both President Trump and former Vice President Biden expect to impact tax revenue and spending allocation.
President Trump’s agenda calls for spending $3.25 trillion on programs that factor in further tax deductions of $0.15 trillion for health care and $1.70 trillion for tax cuts. Biden’s agenda calls for spending of $10.65 trillion on programs that factor in tax increases of $4.3 trillion and savings of $0.75 trillion in national security and immigration.
Infrastructure Is One Sweet Spot Sector
These are at best rough estimates, not knowing the eventual make-up of Congress and the presidency, but one line item that jumps off the page is that no matter how the election ends up, there is going to be somewhere between the amount of $2.7-$4.45 trillion spent on Infrastructure & Other Domestic Spending.
Spending on Roads, Bridges and Other Infrastructure Show Sweet Spot Sector
There is serious Congressional mojo for spending on fixing roads, bridges, ports, clean water, storm water, trains, transit systems, broadband, electric vehicle (EV) charging stations, schools, hospitals, energy transmission, electric grid improvements, etc. There is also great division over what amounts of money should be spent on each category.
If Trump wins and the House and Senate are blue with Democrats in control, then I see no problem with Trump approving whatever amount of money is needed to satisfy all political interests. It is in his DNA to deficit spend for building projects. His latest tweet — “Go big or go home.”
If Biden wins and the House and Senate are blue, then every bit, and probably more, of the $4.45 trillion targeted will be spent, with a high estimate from CRFB of $5.5 trillion.
If Biden wins, the House remains blue and the Senate remains red, then a bill valued somewhere in between will likely be passed. But leave no doubt, infrastructure is something the American electorate has wanted Washington to act on for a decade, and politicians that don’t support a U.S. household repair bill will likely be on the outs.
Investors Should Try to Profit from One Sweet Spot Sector
Under this probable scenario, investors should be able to score big 2021 returns by allocating a portion of portfolio assets to companies that will be on the receiving end of those trillions of dollars being budgeted for the next 10 years. Most of the projects noted are multi-year to completion, making this investment proposition on the level with the bull market in digital transformation that has been all the rage for 2020.
This will be not only be a 10-year plan to upgrade existing infrastructure and add new layers of advanced infrastructure, it’s also designed to be a massive job creation effort by both parties. Thus, emphasis on awarding projects to U.S.-based companies will be a priority but will not entirely eliminate best-in-class foreign companies if they agree to hire American citizens as a precondition.
Those stocks include structural engineering companies, waste remediation companies, earth moving and heavy lifting equipment companies, steel and pipe companies, aggregates companies, broadband equipment companies, cell tower companies, railroad operators and renewable energy companies.
One Sweet Spot Sector Would Include Instructure ETFs
Without naming a list of potential stock winners, investors can do some rapid research on their own by simply taking the following list of some of the exchange-traded funds (ETFs) targeting the infrastructure super cycle, going to Yahoo! Finance and noting the top 10 holdings of each ETF. These management teams are constantly updating their top holdings to reflect both fundamental and technical strength.
From there, one can easily put together a customized list of stocks, depending on the how the composition of the White House and Congress plays out.
Global X U.S. Infrastructure Development ETF (PAVE)
iShares U.S. Infrastructure ETF (IFRA)
Invesco Dynamic Building & Construction ETF (PKB)
iShares Global Infrastructure ETF (IGF)
iShares Global Clean Energy ETF (ICLN)
SPDR S&P Kensho Clean Power ETF (CNRG)
ALPS Clean Energy ETF (ACES)
Using top-down analysis to formulate a bullish sector base case and bottom-up analysis to select the best stocks is how best to position a portfolio for a post-election investing landscape.
There are many unknowns facing the fossil fuel, banking and health care sectors. But last week was the worst since March, so there was really no place to hide. Market-leading consumer discretionary, industrial and technology sectors led the sell-off.
But what was interesting about last Friday afternoon was that, going into the weekend against a very negative tape, traders and investors were bidding up shares of Caterpillar Inc. (CAT), United Rentals Inc. (URI) and the rest of the infrastructure stocks across the board. The rotation was significant and possibly an early sign of future money flow.
A rising tide of infrastructure spending, no matter who wins, looks inevitable. And it’s just this kind of secular investment theme that has the real potential of paying off big. If the market does continue to exhibit a high level of volatility in the coming days, there will be ample opportunity to buy the top infrastructure stocks with the strongest revenue and earnings visibility at attractive entry points. Maybe Christmas will come early in 2020.