Election risks and other headwinds

After a U.S. equity rally in which the S&P 500 gained almost 29% in 2019, investors face an election and other potential headwinds in the year ahead.

The U.S. election has had “little influence on stock prices to date,” said Paul Roukis, portfolio manager for U.S. large cap value strategy at Rothschild & Co. Asset Management U.S. in New York. But that could change as November approaches.

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While there are centrist Democrats vying for the party’s nomination, proposals by the party “extremes” have gained traction, Roukis said in a Jan. 21 interview. That’s what creates market uncertainty.

“Uncertainty is never good for markets, which is why I’m concerned about [what] the potential impact will be on consumer and corporate spending as we approach election day,” said Roukis, who manages the Renaissance U.S. Equity Value Fund.

As the 2016 election showed, “anything can happen, and we simply can’t rule out any of the potential outcomes at this point,” he said. This uncertainty makes it harder for both consumers and companies to plan.

“A potential slowdown in spending could prove to be a headwind for what I consider to be a generally healthy U.S. economy led by a very strong consumer,” said Roukis, who manages the Renaissance U.S. Equity Value Fund.

At this point, he said, the general consensus among investors is that President Donald Trump will be elected to a second term. But that doesn’t mean investors can count on the status quo.

A second term could look different from the first, Roukis said. The U.S. and China signed Phase One of a trade deal earlier this month, ensuring China’s purchase of U.S. goods and reduced U.S. tariffs. The next phase could be years away, and Roukis said the administration’s position could change after the election.

“Could trade protectionism increase if one doesn’t have to worry about re-election?” he said.

Potential sector impacts

Investors are eager to know how the election could affect certain sectors or companies. Roukis said it’s “still way too early” for that, since the outcome of both the presidential and congressional elections will impact what campaign promises become reality.

Right now, the two sectors that appear to be most at risk are healthcare and technology. Roukis pointed to bipartisan support for lower healthcare prices, and promises from some Democratic candidates that “materially could uproot the current system.” However, the market has already started to discount that scenario, he said.

“Certain technology companies are also potential targets given their size, influence and concern by politicians over privacy rules,” he said.

Other macro events

Investors should expect more volatility than last year, Roukis said, pointing to leverage that has “ballooned.” Speaking before the coronavirus started to dominate headlines and impact global markets, Roukis pointed to the potential impact from unknown events.

“History tells us that the most impactful events on investor sentiment usually are the ones that surprise us,” he said. “In other words, the first domino to fall is usually not the one investors expect.”

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