A clear sweep by Democrats is most likely to result in a stronger rotation into value, small caps and emerging-market shares. There should be an accompanying exodus from growth stocks, large caps and defensive developed markets, given a higher probability of fiscal policy support, offset by an increase in corporate and capital gains taxes. This rotation began in earnest in September, as markets started pricing for improved economic conditions to depress the massive valuation gap between defensive and cyclical earnings streams.
The combination of greater federal spending and higher taxes should improve the tone toward value shares but be offset somewhat by even higher turnover -- particularly in growth winners -- ahead of tax changes.
The combination of greater federal spending and higher taxes should improve the tone toward value shares but be offset somewhat by even higher turnover -- particularly in growth winners -- ahead of tax changes.