The stock market could signal that Republicans are about to sweep Congress. Investments that would do well among Republicans are rising, according to Strategas, outperforming those in a hypothetical Democratic portfolio, especially over the past week. According to Dan Clifton, head of policy research at the firm, this could be a sign that the market is finding more potential for Republicans in the midterm elections to win back the Senate, in what was once seen as a long way to go. Strategas creates Democratic and Republican portfolios to identify investments that have the most to gain or lose based on the election result. The company uses the two baskets as a diagnostic tool to gauge how the financial markets view the election. “That basket gave Republicans an 80% chance of winning all spring and then fell over the summer and Democrats had better odds,” Clifton said. “Republicans bottomed around September 7th and have been rallying ever since.” Strategas monitors portfolios relative to the S&P 500 and each other to see what investors are pricing in ahead of the election. The Republican portfolio peaked versus the Democrat portfolio on May 3, the day after the leaked report on the upcoming Supreme Court ruling in Roe v. Wade, his peak. An iconic sector for the Biden administration has been renewable energy, and these stocks and ETFs have lost ground since mid-September. At the same time, the chances of a Republican victory on November 8 have increased. For example, the iShares Global Clean Energy Fund fell 4.8% over the past week and 23.2% over the past month. Individual solar and other renewable names are also down 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 was to remain in Democratic hands until recently. “For a while it was 65 percent for a Democratic Senate, but now it’s 50/50,” Clifton said. Clifton said his portfolios suggest a 60 percent chance of a Republican win while betting markets are 50/50. Investments in the Democrat portfolio include renewable energy, HMOs and hospitals. “If the Democrats win, they will transcend 100 years of history and 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 could do more but be more frugal in other areas, he said. “If the Republicans sweep … from a macro perspective, that will allow for government spending restraints. It helps the Fed do its job on inflation,” Clifton said, noting that bond yields could fall. Other areas include fossil fuel energy, infrastructure, and immigration-related stocks such as private prisons. Clifton said Thursday’s very hot CPI was important and the Republican recovery had really started when the previous CPI report came out in September. Consumer prices rose 8.2% on an annualized basis in September after also rising a better-than-expected 8.3% in August. “This election is about inflation, crime and other issues that benefit Republicans,” Clifton said. The Strategas Republican portfolio “has been really moving since the last inflation report… It bottomed on Sept. 7 and was outperforming 5% at Thursday’s close,” he said. Holdings in the Republican portfolio include companies that would benefit from oil and gas distribution and transportation, such as Enterprise Products Partners. Companies that would benefit from more border enforcement and security, such as Axon Enterprise, are also included. There are also companies that would benefit if Republicans could take tax increases off the table. These include a global tax and tax increases for multinational companies. From this perspective, winners could include Monolithic Power Systems. Strategas expects a deadlock if Republicans win even one house of Congress, and that would limit spending, which is seen as less inflationary. Investments that benefit from lower inflation include the iShares 1-3 year Treasury ETF, as bond prices rise when interest rates fall. Defense players like Lockheed Martin are included, as are drug companies like Johnson and Johnson. The Democratic portfolio was overturned in the spring and summer by the overturning of the Roe v. Wade supported by the Supreme Court guaranteeing a constitutional right to abortion. Polls show that a majority of Americans disapprove of this ruling. This portfolio contains investments that benefit from inflation, such as the ProShares Ultra Short 20+ Year Treasury ETF. Utilities like NextEra have been included as a hedge against inflation. Democrats could increase broadband and water funding in another infrastructure bill if they swept, so the portfolio includes stocks like Northwest Pipe. Democrats would support continued aid to Ukraine, including spending on drones and missiles. Aerojet Rocketdyne Holdings is included for this reason. Child tax credit legislation would help consumers, and that could boost stocks like retailer Children’s Place. A democratic health policy could help names like Molina Healthcare on the jump. “The market is increasingly pricing in a Republican breakthrough. To do that, you have to find 51 Senate seats, and Republicans really didn’t have a path to 51,” Clifton said. He noted that Georgia GOP nominee Herschel Walker has plummeted in polls, but of late the state he has his eye on for a possible Republican victory is Pennsylvania. “It rides Pennsylvania now. It rides Georgia,” he said. Democratic lieutenant gubernatorial candidate John Fetterman is running for Senate in Pennsylvania against Republican Mehmet Oz. Fetterman’s health has been a concern 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. Fetterman leads a consensus poll by just 3.4 percentage points, according to Real Clear Politics. “The big X-factor, I think, is whether there will be an impeachment against former President Trump before the election,” Clifton said. “The Jan. 6 committee subpoenaed Trump, which Trump will likely ignore, and if he ignores it, they will refer him to the Justice Department.” Clifton said this could worry some Republican voters who may also be unhappy with reports that Trump ordered the removal of classified documents requested by the government.
