What the Democrat sweep means for portfolios

Saltydog Investor mulls over the implications for funds

Last week’s US midterm elections have changed the political landscape in Washington DC, and investors are already considering what the results might mean for stock markets.

The Democrats won control of both the House of Representatives and the Senate, but Donald Trump remains president.

That creates an interesting situation, with the Democrats able to block new Republican legislation but finding it much harder to introduce their own policies.

The immediate market reaction was initially positive, with the main US indices rising on Wednesday. However, sentiment changed dramatically on Thursday, when the Nasdaq fell by 5.5%.

Technology shares have been under pressure for some time.

At Saltydog Investor, we monitor the performance of Investment Association (IA) sectors and the individual funds within them.

Our figures show that Technology & Technology Innovation fell by 8.8% in October, having gained 4.8% in September. It lost another 7.3% during the first week of November.

That represents quite a turnaround for a sector that gained 15.8% in April and 16.5% in May.

The weakness began well before the election, and there are several possible explanations.

Investors have become increasingly concerned about technology company valuations, the enormous sums being invested in artificial intelligence (AI) and whether those investments will generate the expected returns.

Political developments could now add another layer of uncertainty.

The Democrats may use their greater influence in Congress to increase scrutiny of the rapid expansion of AI, particularly the construction of enormous data centres and the pressure they place on electricity supplies.

That could create additional obstacles for technology companies that have committed billions of dollars to developing AI infrastructure.

While technology has been one of the clearest losers, identifying potential winners is rather more difficult.

Stock markets tend to move ahead of the news, as investors try to anticipate what might happen next. It is therefore also worth looking at what was happening in October, before Americans went to the polls.

The leading IA sectors were Healthcare & Biotechnology, which gained 5.7%, and Infrastructure, with a one-month return of 4.5%.

Perhaps investors were becoming more defensive ahead of the elections, reducing their exposure to technology shares and moving towards businesses with more predictable revenues.

Alternatively, they may have been anticipating changes in the political landscape. It could well have been a combination of the two.

The Democrats have traditionally supported greater access to healthcare, increased investment in public services and the development of renewable energy and infrastructure.

However, even with control of Congress, they will struggle to introduce major policy changes without support from the White House.

With neither party able to implement its policies without opposition, political stalemate could become a feature of the next two years.

That is not necessarily bad news for stock markets.

Some investors welcome divided government because it reduces the likelihood of sweeping changes to taxation, spending and regulation.

If the prospect of prolonged deadlock encourages investors to become more cautious, businesses with established revenues and relatively predictable demand could become more attractive.

Healthcare and infrastructure both contain companies with these characteristics, although not every company within these sectors will necessarily be affected in the same way.

In healthcare, policies designed to widen access to medical treatment could favour hospitals, healthcare providers and some insurance companies.

On the other hand, efforts to reduce prescription drug prices could put pressure on pharmaceutical and biotechnology businesses.

Infrastructure presents a similarly mixed picture.

Companies involved in electricity networks and renewable energy could benefit from more supportive policies, while those developing oil and gas pipelines and other fossil fuel infrastructure projects could face greater regulatory scrutiny and restrictions.

Several healthcare and infrastructure funds performed well in October. The following table highlights four that caught our attention.

Data source: Morningstar. Past performance is not a guide to future performance.

The graph below shows how the four funds have performed since the beginning of the year.

Past performance is not a guide to future performance.

The two infrastructure funds got off to a strong start, both gaining more than 10% by the end of February. They then moved broadly sideways through much of the summer, before falling back in September. However, they rallied strongly in October.

Healthcare followed a very different pattern. Both funds lost ground during the first five months of the year, falling by around 8% at their lowest points.

However, they have since staged an impressive recovery, with particularly strong gains since the beginning of October. Both are now comfortably ahead for the year.

With political stalemate potentially becoming a feature of the next two years, investors may increasingly favour businesses that are less dependent on changes in government policy.

Healthcare and infrastructure have already shown encouraging signs of strength, and both sectors contain companies that could prove attractive if investors become more defensive.

Looking further ahead, investors will also be considering the 2028 presidential election and the possibility of another change in the political landscape.

These sectors contain businesses that could benefit from a change in the White House.

In the meantime, it will be interesting to see whether their recent gains continue.

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