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Follow Morgan Stanley to Trade 2020 Election With ETFs

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America’s poll is a year away and the race to presidency may bring a lot of volatility and uncertainty to the stock market, which is currently hovering at an all-time high. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has climbed 10.1% on average during election years since 1952 when a sitting president has run for reelection. Over the same period, the blue-chip average has fallen 1.6% during election years when there's an open field.

Per John LaForge, head of retail asset strategy for Wells Fargo Investment Institute, the Dow Jones has had an average return of 7.6% during presidential election years since 1900, and positive returns 70% of the time during those 30 occurrences. Bonds and stocks historically struggled in the first half of election years and rose later in the year (read: 9 High-Flying ETFs of 2019).

The two key Democratic presidential candidates are Elizabeth Warren and Bernie Sanders, who will battle it out with Donald Trump. Wall Street experts forecast major losses for the U.S. stock market if Democrat Elizabeth Warren wins the 2020 presidential election.

As such, Morgan Stanley outlined four outcomes of the 2020 election and its strategies for investors on how to make the most of them.

Democrats Win White House, Split Congress

Under this scenario, alternative energy stocks would gain, and oil and gas stocks along with big banks will lose. This is because Elizabeth Warren has hyped an ambitious climate change plan, calling for $3 trillion in spending to move the United States to 100% clean energy under a 10-year plan and safeguard poorer communities that are dependent on the production of fossil fuels.

As such, investors could invest in alternative energy ETFs like iShares Global Clean Energy ETF ICLN, Invesco Cleantech ETF PZD, Invesco WilderHill Clean Energy ETF (PBW - Free Report) and First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN - Free Report) (read: Clean Energy ETFs Riding Higher).

Republicans Win White House, Split Congress

In this scenario, where if President Trump is reelected and Congress remains divided between a Republican Senate and a Democratic House, bank and oil stocks will be the biggest winners. The status quo will fuel the gradual rollback of banking, and oil and gas regulations.

Given this, bank funds — SPDR S&P Bank ETF KBE, Invesco KBW Bank ETF KBWB, SPDR S&P Regional Banking ETF (KRE - Free Report) and iShares U.S. Regional Banks ETF (IAT - Free Report) — and oil ETFs like SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) , Energy Select Sector SPDR Fund XLE, and VanEck Vectors Oil Services ETF (OIH - Free Report) could see continued upside (read: Trump May See Easy "Win in 2020:" ETFs to Bet On).

Democrats Sweep White House, Congress

In this outcome, where if Democrats take the White House as well as both chambers of Congress, the unified government will likely expand spending on health care, transportation and infrastructure, thereby providing a boost to these sectors. As a result, investors could invest in some of the popular healthcare ETFs like Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Healthcare ETF VHT, iShares Nasdaq Biotechnology ETF (IBB - Free Report) and SPDR S&P Biotech ETF (XBI - Free Report) (read: Healthcare ETFs Win in October: Here's Why).

Transportation funds iShares Transportation Average ETF (IYT - Free Report) , SPDR S&P Transportation ETF (XTN - Free Report) and First Trust Nasdaq Transportation ETF FTXR will also see smooth trading under this scenario. However, the Democratic coalition would call for heightened scrutiny and pressure on big financial firms, big tech and big pharma.

Republicans Sweep White House, Congress

The last outcome could be Republicans taking back the House and Trump staying back in the White House. This could propel the current pace of deregulation. U.S. oil and gas, financial firms and telecommunication companies would see a boon while emerging markets could come under pressure if the U.S. dollar strengthens further.

Here again, bank and oil ETFs will see solid trading while emerging market ETFs like Vanguard FTSE Emerging Markets ETF VWO, iShares Core MSCI Emerging Markets ETF IEMG and iShares MSCI Emerging Markets ETF (EEM - Free Report) willcontinued to struggle (read: Emerging Market ETFs Beating the Broader Market: Here's How).

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