Sectors to watch following the U.S. Midterm elections

Nov 6, 2018
By Christopher Dhanraj

Investor angst over the sustainability of earnings growth and the impact of trade tensions has pummeled equity markets. The U.S. midterm elections and their aftermath represent another catalyst that should be on investors’ radar, we believe.

Taking a step back can be a good exercise. The S&P 500 Index has risen 27% since the 2016 elections, with big moves at the industry level as investors anticipated regulatory and political catalysts driven by a one-party hold amongst the executive and legislative branches.1

The October sell-off now brings the S&P 500 valuations down to a more reasonable 14.8x price to next year’s calendar earnings multiple – the lowest level in over 2 years. 1

As attractive valuations are an effective tool to bring investors back to the table, the following industry groups may be in focus as investors look past midterms to the end of the year.

Performance of select exposures since the November 2016 presidential elections and in Q4 2018

Performance of select exposures since the November 2016 presidential elections and in Q4 2018

Source: Thomson Reuters, BlackRock, as of October 24, 2018.
Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.

Aerospace & Defense

Military spending has been a key priority for President Trump’s administration: the Department of Defense (DoD) has increased its spending by 9% in 2018 from the prior year.2 In addition, the 2019 National Defense Authorization Act was passed at its swiftest pace in 20 years, up to $717 billion (a 12% increase from 2017).2 Even the 13% quarter-to-date in the Dow Jones U.S. Aerospace & Defense Index (as of October 29th), the industry group is still up 46% since 2016 Election Day and remains the purest way to play any change in defense spending outlook.

Healthcare

Drug pricing should remain a key issue post Midterm elections. Investors may be surprised that healthcare has fared well in the past year, benefiting from a defensive rotation by investors and strong corporate earnings growth. In the second half of 2018 since June 30, the industry has rallied 4.6%, joining other perceived safer haven equity areas such as Consumer Staples 6.4% and Utilities 6.3%.3 Valuation concerns have been addressed as forward P/Es have been reduced to ten-year lows. Additionally, investors have been digging even deeper to gain exposure to longer term trends such as Medical Devices, which at 16.8% year-to-date are handily beating both the sector and the broad S&P 500.3

Infrastructure

Infrastructure represent both an opportunity and a promising area of political consensus. Policymakers from both sides of the aisle have come to realize the need for U.S. infrastructure spending given recent reports indicating the U.S. has the largest infrastructure estimated spending gap in the world over the 2016 to 2040 period.4 While differences on how to fund infrastructure spending bills remain, a bi-partisan solution can be a catalyst for this industry group.

Bottom line

Looking beyond the noise can be a useful exercise heading into 2019. Taking industry-level views can be a useful way to play post-Midterm election market trends, with the tailwind of more favorable valuations providing an opportunity for investors.