The stock market may be signaling Republicans are about to sweep Congress. Investments that would do well under Republicans are edging higher and outperforming those in a hypothetical Democratic portfolio, particularly in the past week, according to Strategas. That could be signaling that the market is sniffing out more potential for Republicans in mid-term elections to regain the Senate, once thought as a long shot, according to Dan Clifton, head of policy research at the firm. Strategas creates Democratic and Republican portfolios to identify investments that have the most to gain or lose, based on the election outcome. The firm uses the two baskets as a diagnostic tool to measure how financial markets view the election. “This basket was giving the Republicans 80% odds all spring and then through the summer it fell, and the Democrats had a better chance of winning,” said Clifton. “The Republicans bottomed out right around Sept. 7 and have been rallying ever since.” Strategas watches the portfolios relative to the S & P 500 and to each other to identify what investors are pricing in about the elections. The Republican portfolio peaked relative to the Democratic one on May 3, the day after the leaked report of the impending Supreme Court ruling on Roe v. Wade. One sector that has been emblematic for the Biden administration has been renewable energy, and those stocks and ETFs have lost ground since mid-September. At the same time, odds for a Republican sweep on Nov. 8 have the rice. For instance, the iShares Global Clean Energy Fund fell 4.8% this past week and 23.2% over the past month. Individual solar and other renewable names are also down sharply, like First Solar, which is in the Strategas Democratic portfolio. Republicans have been expected to win control of the House of Representatives, but the Senate was expected to remain in Democratic hands until recently. “For a while it was 65% for a Democratic Senate, but it’s now 50/50,” Clifton said. Clifton said his portfolios are pointing to a 60% chance of a Republican sweep, while betting markets are at 50/50. The investments in the Democrat portfolio include HMOs and hospitals, in addition to renewable energy. “If the Democrats win, they’ll be overcoming 100 years of history, and they’re going to claim they have a mandate,” he said. “They’re going to do the child tax credit, Medicare expansion and renewable energy.” Both parties would increase defense spending, but Republicans may do more but be more frugal in other areas, he said. “If the Republicans sweep…from a macro perspective it allows limits on government spending. It helps the Fed do its job on inflation,” Clifton said, noting bond yields could go lower. Other areas include fossil fuel energy, infrastructure and immigration related stocks, like private prisons. Clifton said Thursday’s very hot consumer price index was important, and the Republican rebound really started when the previous CPI report was released in September. Consumer prices were up 8.2% on an annual basis in September, after rising an also higher-than-expected 8.3% in August. “This election is about inflation, crime and other issues that are working towards the Republicans’ benefit,” said Clifton. The Strategas Republican portfolio “has really been on the move since the last inflation report…It put in a low Sept. 7 and outperformed by 5% as of Thursday’s close,” he said. Among the holdings in the Republican portfolio are companies that would benefit from distribution and transportation of oil and gas, like Enterprise Products Partners. Companies are also included that would benefit from more border enforcement and security, such as Axon Enterprise. There are also companies that would be winners if Republicans are able to take tax increases off the table. That would include a global tax and tax increases on multinationals. Winners from that perspective might include Monolithic Power Systems. Strategas expects gridlock if Republicans win even just one house of Congress, and that would limit spending, which is seen as less inflationary. Investments that benefit from less inflation include iShares 1-3 year Treasury ETF, since bond prices rise when interest rates fall. Defense plays such as Lockheed Martin are also included, as are pharmaceutical companies including Johnson and Johnson. The Democratic portfolio was helped in the spring and summer by the Supreme Court’s overturning of Roe v. Wade, which guaranteed a constitutional right to abortion. Polls show a majority of Americans disapprove of that ruling. That portfolio holds investments that benefit from inflation, like the ProShares Ultra Short 20+ Year Treasury ETF. Utilities like NextEra were included as a hedge against inflation. Democrats could increase broadband and water funding in another infrastructure bill if they were to sweep, so the portfolio contains stocks such as Northwest Pipe. Democrats would favor continuing aid to Ukraine, including spending for drones and missiles. Aerojet Rocketdyne Holdings is included for that reason. The child tax credit legislation would help consumers and that could boost stocks such as retailer Children’s Place. Democratic health care policies could boost names like Molina Healthcare. “The market is increasingly pricing in a Republican sweep. To do that, you need to find 51 Senate seats and the Republicans really had no path to 51,” Clifton said. He noted that Georgia GOP candidate Herschel Walker has plummeted in polls, but lately Pennsylvania is the state he is eyeing for a possible Republican win. “It’s now riding on Pennsylvania. It was riding on Georgia,” he said. Democratic candidate lieutenant governor John Fetterman is running against Republican Mehmet Oz for Senate in Pennsylvania. Fetterman’s health has been an issue since he suffered a stroke in May, but the candidate says he will have no problems serving. Clifton said an interview that Fetterman did with NBC News last week did not come off well and may have hurt him. Fetterman is leading by just 3.4 percentage points in a consensus of polls, according to Real Clear Politics. “The big X factor in my opinion is whether there’s going to be an indictment of former President Trump before the election,” said Clifton. “The Jan. 6 committee subpoenaed Trump, which Trump is probably going to ignore, and when he ignores it they are going to refer him to the Justice Department.” Clifton said that could concern some Republican voters, who could also be unhappy with reports that Trump had ordered the removal of classified documents that the government was requesting.
