Shares give some clues there could be a Republican congressional sweep, Strategas says

The stock market may indicate that Republicans are on the brink of conquering Congress. Investments that would do well among Republicans are rising, according to Strategas, outperforming those in a hypothetical Democratic portfolio, especially in the past week. According to Dan Clifton, the company’s chief of policy research, that could signal that the market is soaking up more potential for Republicans in midterm elections to win back the Senate, once seen as an opportunity. Strategas creates Democratic and Republican portfolios to identify investments that have the most to gain or lose, based on election results. The company uses the two baskets as a diagnostic tool to measure how financial markets view the election. “This basket gave Republicans an 80% chance all spring and then it fell through the summer, and the Democrats had a better chance of winning,” Clifton said. “Republicans hit rock bottom around Sept. 7 and have been building up ever since.” Strategas looks at portfolios against the S&P 500 and against each other to determine what investors are pricing in about the election. The Republican portfolio peaked against the Democratic one on May 3, the day after the leaked report of the pending Supreme Court ruling in Roe v. Wade. One sector that has been emblematic of the Biden administration is renewable energy, and those stocks and ETFs have lost ground since mid-September. At the same time, the odds of a Republican sweep on Nov. 8 have risen. For example, the iShares Global Clean Energy Fund fell 4.8% last week and 23.2% last month. Individual solar and other renewable names have also fallen sharply, such as First Solar, which is in the Strategas Democratic portfolio. Republicans were expected to gain control of the House of Representatives, but the Senate would remain in Democratic hands until recently. “For a while it was 65% for a Democratic Senate, but it’s 50/50 now,” Clifton said. Clifton said his portfolios point to a 60% chance of a Republican sweep, while the betting markets are 50/50. Investments in Democrats’ portfolio include HMOs and hospitals in addition to renewable energy. “If the Democrats win, they will conquer 100 years of history and they will claim they have a mandate,” he said. “They’re going to do the child tax credit, Medicare extension, and renewable energy.” Both parties would increase defense spending, but Republicans could do more but be more frugal in other areas, he said. “If the Republicans swipe…from a macro perspective, it allows caps on government spending. It helps the Fed do its job on inflation,” Clifton said, noting that bond yields could come lower. Other areas include fossil energy, infrastructure and immigration-related supplies, such as private prisons. Clifton said Thursday’s very hot consumer price index was important, and the Republican rebound really kicked off when the previous CPI report was released in September. Consumer prices rose 8.2% year-on-year in September, following a similarly higher-than-expected 8.3% in August. “This election is about inflation, crime and other issues that work in favor of Republicans,” Clifton said. The Strategas Republican portfolio “has been really on the move since the last inflation report… It hit a September 7 low and outperformed Thursday’s close by 5%,” he said. Among the holdings in the Republican portfolio are companies that would benefit from the distribution and transportation of oil and gas, such as Enterprise Products Partners. Companies that would benefit from increased border enforcement and security, such as Axon Enterprise, are also included. There are also companies that would be winners if Republicans could take tax increases off the table. That would include a global tax and tax increases for multinational corporations. Winners from that perspective could be Monolithic Power Systems. Strategas expects a stalemate if Republicans win even one House of Congress, and that would curtail spending, which is considered less inflationary. Investments that benefit from less inflation include iShares 1-3 Year Treasury ETF, as bond prices rise when interest rates fall. Defense games such as Lockheed Martin are also included, as are pharmaceutical companies, including Johnson and Johnson. The Democratic portfolio was aided in the spring and summer by the Supreme Court’s quashing of Roe v. Wade, which guaranteed a constitutional right to abortion. Polls show that a majority of Americans disapprove of that statement. That portfolio includes investments that benefit from inflation, such as the ProShares Ultra Short 20+ Year Treasury ETF. Utilities such as NextEra were included as a hedge against inflation. Democrats could raise broadband and water financing in another infrastructure bill if they swiped, so the portfolio includes stocks like Northwest Pipe. Democrats would favor continued aid to Ukraine, including spending on drones and missiles. Aerojet Rocketdyne Holdings has been incorporated for that reason. Child tax credit legislation would help consumers and that could boost stocks like retailer Children’s Place. Democratic health care policies could boost names like Molina Healthcare. “The market is increasingly praising a Republican sweep. To do that, you have to find 51 Senate seats, and the Republicans really had no way of getting to 51,” Clifton said. He noted that Georgian GOP candidate Herschel Walker has plummeted in polls, but lately Pennsylvania has been the state he looks to for a potential Republican victory. “He’s driving Pennsylvania now. He rides Georgia,” he said. Democratic nominee Lieutenant Governor John Fetterman is running against Republican Mehmet Oz for the Pennsylvania Senate. Fetterman’s health has been an issue since he suffered a stroke in May, but the candidate says he will have no trouble serving. Clifton said an interview Fetterman did with NBC News last week didn’t go well and may have hurt him. According to Real Clear Politics, Fetterman leads by just 3.4 percentage points in a consensus of polls. “The big X factor, in my opinion, is whether there will be an indictment against former President Trump before the election,” Clifton said. “The Jan 6 commission has subpoenaed Trump, which Trump will likely ignore, and if he ignores it, they will refer him to the Justice Department.” Clifton said this could alarm some Republican voters, who may also be unhappy with reports that Trump had ordered the removal of classified documents the administration had asked for.

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