Investors in US equities prepare for lurch to the left
Impact of political manoeuvring from Democrats is most visible in healthcare stocks
Donald Trump likes to say that the pumped-up US stock market is a reflection of his political success, a highly visible, real-time barometer of his chances of a second term as US president. If so, there are some signs that momentum is building — but for the other side.
One good example: the healthcare sector. Challengers for the Democrats’ presidential nomination have largely fallen in line behind “Medicare for All”, most readily associated with Bernie Sanders, the senator from Vermont, under which a single government-run plan would provide insurance coverage to all Americans.
Supporters say the plan would cut exorbitant costs while diminishing the power of for-profit health and insurance providers. Critics argue a greater role for the government would place an intolerable burden on the taxpayer. But for healthcare companies, whose business models rely on the status quo, the impact of the debate has been tangible.
This year the S&P healthcare sector has returned about 12 percentage points less than the broader S&P 500, with dividends reinvested. That marks a reversal for a sector that has beaten the market by about 40 percentage points over the past decade.
“Financial markets have started to react to campaign rhetoric,” Jan Hatzius, chief economist for Goldman Sachs, wrote in a research note last month. “Prices of health-related stocks, in particular, have already begun to react to new proposals.”
The proposals were criticised by David Wichmann, chief executive of Minnesota-based UnitedHealth, one provider whose share price has dipped despite solid earnings. Speaking on the company’s first-quarter earnings call in April, Mr Wichmann said the “wholesale disruption” of a change to the system would “surely jeopardise the relationship people have with their doctors . . . and limit the ability of clinicians to practise medicine at their best”. He added: “The inherent cost burden would surely have a severe impact on the economy and jobs, all without fundamentally increasing access to care.”
Such talk hints at the size of the challenge facing healthcare companies should a Democratic president try to push through reforms. But the chances of a radical overhaul are low. The party would have to claim the presidency and two chambers of Congress to drive meaningful change — an unlikely scenario, according to Goldman.
Even so, the episode hints at what could be a rocky patch for investors in the run-up to November 2020 when Americans go to the polls again.
A rollback of the corporate tax cuts passed by the Trump administration at the end of 2017, alongside a firmer hand on the regulatory rudder for sectors such as technology and financial services, would also weigh on corporate profits. One Democratic candidate, Massachusetts senator Elizabeth Warren, has called for a 7 per cent tax on corporate profits above $100m to help pay for US student debt.
“The stock market is an old-fashioned Republican — it doesn’t like regulation, it doesn’t like trade wars, but it likes low taxes,” said Charlie Bobrinskoy, a portfolio manager for Ariel Investments.
Ms Warren has also put forward a plan to carve up tech companies including Google and Amazon, arguing that their vast scale hurts competition. On Thursday this week Alexandria Ocasio-Cortez, a member of Congress and self-described “democratic socialist”, teamed up with Mr Sanders to propose a 15 per cent interest rate cap on all consumer loans — a move which would squeeze credit card operators while effectively throttling payday lenders. Shares in such companies were notably weak that day, almost across the board.
“Depending on how the next 18 months shapes up, the [financial services] sector could be facing real legislative and regulatory pressure,” wrote analysts at CreditSights.
The broader context is unsettling too. Next month, the post-crisis economic expansion in the US will become the longest since the second world war — a marker that feeds fears that its end is approaching, rather than hopes it will endure.
US corporate earnings growth has already slowed this year and worries over a weaker economy have prompted a policy reversal from the Federal Reserve. The central bank’s U-turn — in part a response to the tumultuous end to 2018 for US stocks — has breathed fresh life into the market. But it has also revealed fragility and a heavy reliance on low interest rates.
Given Mr Trump’s history of aligning himself to the stock market and, in recent months, pressuring central bankers, he may seek to use his Twitter account to influence the market for political gain.
“Trump, unlike any other president, ties his performance to the equity market,” said Michael Harris, president of Campbell & Company, a Baltimore-based hedge fund with $3.1bn in assets.
Mr Trump’s claims that he has boosted stocks may be dubious, but the effect of campaign rhetoric from his would-be challengers is clear.
Elaine Stokes, a Boston-based portfolio manager with Loomis Sayles, said she did not pay much attention to social media feeds a few years ago. “Now I spend more time reading and following political and geopolitical news more than anything else I do.”