Sectors to watch after U.S. midterms

U.S. midterm election results and slower global growth mean investors might want to reconsider some sectors.

In a weekly equities report, BMO senior economist Robert Kavcic put last week’s U.S. midterm elections, in which the Democrats took the House of Representatives, in a historical perspective. Since 1951, a split Congress has yielded about a 7% average annual return for the S&P 500, versus more than 9% when one party held both House and Senate, and an even stronger 11% when the same party also held the White House.

Though the differences in returns are likely a result of economic circumstances at the time, says Kavcic, a Democrat-led House and divided Congress will likely create more political and policy uncertainty.

However, the elections also provided some certainty. For example, regulatory reform now looks less likely in healthcare because of the split Congress, so associated stocks could benefit, notes a CIBC economics report.

Still, U.S. equities remain vulnerable to slowing global growth and rising interest rates, the report says.

It adds that slower global growth was reinforced by the IMF’s forecast downgrades in early October. For example, the IMF expects U.S. growth to soften to 2.5% in 2019, down from a previous forecast of 2.7%, and Canada’s 2019 growth projection is 2%. Softer growth figures are also forecast for other advanced economies, including the euro area, the U.K. and Japan.

Among emerging economies, China’s growth is forecast at 6.2% in 2019, reflecting “slowing external demand growth and necessary financial regulatory tightening,” says the IMF in its outlook.

Since these forecast updates, S&P 500 sectors with a relatively high exposure to foreign demand for sales—such as energy and industrials—have generally underperformed, notes the CIBC report.

In contrast, “a strong U.S. consumer has propelled gains in consumer staples,” it says. Further, utilities have outperformed, reflecting historically low interest rates. Thus, “Despite an imminent slowdown in global growth, certain sectors may still be attractive for investors,” says the report.

For the TSX, a housing slowdown is hitting Canadian retailers, contributing to losses in consumer discretionary stocks.

“Consumer spending has been limited by higher gasoline prices that have eaten into purchasing power amidst tame wage gains,” says the CIBC report.

Further, a slowdown in housing market activity has been a source of retailers’ woes, it says, as the slowdown has resulted in fewer purchases for furniture and building materials. Monetary policy tightening could add to those woes.

“Investors could remain wary of retail stocks that rely heavily on housing-related goods given that the BoC is still talking hawkishly,” says the report.

Read the full reports from BMO’s Kavcic and CIBC.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.