Hilary Clinton is likely to defeat Donald Trump in November but the race will be tight and rising political uncertainty could lead to a 10% drop in the stock market in the next few months, according to Goldman Sachs’ chief U.S. equity strategist David Kostin.
Political risk often leads to volatility but it could be worse this time around, Kostin argues in a recent research note; that’s because Trump has talked about protectionism and increasing tariffs on imports especially from China and Mexico. Kostin and the other Goldman analysts say that’s bad news for the large companies in the U.S., which generate a good portion of their sales overseas. Nearly 40% of the sales of the companies in the S&P 500 come from overseas.
So while the Goldman analysts think the market in general won’t spring this summer, they do say there could be opportunities in companies that sell consumer staples, like household items or food. So-called safety stocks tend to do better when the market is rocky. (Generally it’s not great to be trading in and out of the market, but that’s another story)
Goldman says the ones that will do best are companies that generate a large portion of their sales in the U.S. because they will be less affected by the threat that Trump could win and cut off trade. An added bonus, Goldman says, is that the companies with a majority of their sales in the U.S. tend to pay higher taxes than companies that generate more of their sales overseas. Trump has pledged to cut the corporate tax rate to 15%. So companies with higher taxes will get a bigger boost. Base on that formula—consumer staple companies with high U.S. sales and high taxes—Goldman says stocks that are good buys now are Cardinal Health (CAH), Chipotle (CMG), Whole Foods (WFM), and tobacco company Reynolds American (RAI).
But some market watchers say even buying consumer staple stocks is too risky right now. Doug Kass, a well known short-seller and money manager at Seabreeze Partners, wrote in an email on Monday that he thinks Goldman and others touting consumer staples stocks as safe-havens are wrong. The big problem, for Kass, is valuation.
One of Kass’ big examples is Coca-Cola (KO), which Kass says he is short, meaning he’s betting the soda maker’s stock price will fall. Shares of Coke are up nearly 2.5% this year, which may not sound like a lot but it is when the rest of the market is essentially flat for the year. That’s left Coke’s shares trading at a price-to-earnings ratio, based on last year’s income, of nearly 27, yet it’s only expected to increase its earnings per share (EPS) 4% in the next year. Kass says that combination of high P/E and low growth is a problem; and he says that’s especially true for Coke, which generates a lot of its earnings overseas. Emerging markets have stalled and as the dollar strengthens amid expectations for more Fed rate hikes this summer, Kass says that will make selling overseas even harder for Coke.
Even the stocks that are “safe” may be too risky in this market.