Market Q&A with Blaine:
Real Estate & Sector Outlook Post-Election

We recently asked readers of our popular market commentary, the Weekly Research Briefing, to submit market-related questions for author Blaine Rollins, CFA. We had a lot of questions come in, so we thought we would use this week’s blog to share some of Blaine’s responses.

Question: How much do you see the stimulus deal (or lack there of if it fails to pass this week) affecting markets over the next few months?

Blaine: The stock market wants a new stimulus deal. Anything to help us stay out of a recession and a new banking crisis. This is why daily stock prices are laser focused on the timing of the assistance to 25 million out-of-work Americans. If they can’t pay rents, mortgages or auto payments, it will move through the economy quickly and you might be able to get that F-150 pickup truck for fifty cents on the dollar.

The sooner the better on this new stimulus package. The White House and Speaker of the House Pelosi are narrowing into a $1.9 trillion dollar package. Will the Senate put it to a vote and approve it? If they don’t, it will likely cement the Democratic takeover of Congress in November given that 75% of Americans want it passed now. If it doesn’t happen before the election, then Senator Schumer said yesterday that he will try and get it passed in the lame duck session. And if that doesn’t work, then likely a much bigger stimulus will be passed in January. But will it be too late for the American economy if the aid does not help until February? You can guess that every retailer in the U.S. is holding their breath right now while it’s uncertain which way holiday sales will go.

Question: What stocks/sectors will be attractive with a Biden win or a Trump win?

Blaine: If Vice President Biden were to win the White House and the Dems were to take the Senate and control Congress, then you could look to the following sectors to benefit:

    1. Financials like banks and insurance stocks, should do well as interest rates rise due to the impact of a very large fiscal stimulus package in 2021. Banks and other credit spread assets may also benefit from the increased certainty that loans and rents would be paid.
    1. Stocks tied to the output of a two-trillion dollar infrastructure package would also benefit. Think of new roads, bridges, hospitals, schools, water, electrical and broadband systems and everything needed to build them. Cement, aggregates, steel, big earth moving equipment, cranes, platforms, railcars, pipes, glass fiber, the manpower to build it all.
    1. Alternative energy stocks have done very well in anticipation of the change in government, but now they need to execute. I’d expect fewer barriers to their growth combined with financial incentives to help push greener power across the U.S.
    1. U.S. multinationals and big exporters will benefit from a falling U.S. dollar and lower tariffs with our trading partners.
    1. Agricultural equipment stocks and rural businesses will likely see better times as farmers sell more grains and meats overseas versus living off of U.S. Government assistance.

Under a Trump win, and if the Senate were to stay in GOP hands, then just take short positions in all of the above bullet points. And, consider buying oil-based energy stocks, defense manufacturers, HMOs and high-end consumer spending companies.

Question: If we have another large spike in COVID cases, will the same stocks/sectors that crushed it then crush it again? Do you see it following the same pattern?

Blaine: If COVID data makes a surprising spike higher, you could see similar stocks/sectors get hurt/helped in the short-term as investors replay that same playbook. But it is likely that the magnitude of the moves will be lower because what was previously unknown about COVID is now much better known. We know better how to treat the virus, as well as how to protect against catching it. We also know that the elderly, and those with high risk conditions, should be isolated to reduce the risk of hospitalization. So, while the airline and cruise ship stocks might again fall toward their year-to-date lows on a new run in cases, I would be very surprised to see them fall another 60-80% from these levels.

Question: What’s the outlook for commercial vs. residential real estate? If working from home becomes the norm (even a few times a week with companies potentially downsizing), what will that mean for commercial?

Blaine: Given that our 14-story office building remains only 10-15% occupied seven months after the outbreak of COVID, I’d say that the commercial real estate market is going to have the more difficult time recovering. White collar businesses that aren’t essential are having a difficult time reopening due to their employees’ fears, and also the risk of having an employee base or a client infected and shut down. Probably 90% of financial services workers are currently working remotely from home with most in-person client relation activity off limits right now.

Someday COVID will be in the rearview mirror and we can return to the office, but in the meantime, we have all taught ourselves how to be very productive without the one-hour commute. Expect many white collar office space requirements to shrink in the long-term as more employees work more from home. Now expand that 20-30% shrink across office space all across the U.S. The owners of office portfolios are about to see some ugly performance numbers over the next several years.

Question: What should I do with my fixed income allocation?

Blaine: I would run fast and far away from it. Seriously, I would and have. Much money has been made this year following the Fed’s announcement in March and piling into the credit markets. High grade and low-grade corporates have had 20-40% moves off the lows. But now most of the credit spreads have returned to historically tight levels, so basically you are just betting on the direction of interest rates.

I would not want to take much credit risk at all right now given that we are still discussing the potential for a recession and a banking crisis if Congress does not implement another fiscal stimulus package. If you think that we are headed for another recession, then a 100% Treasury portfolio looks like a good bet. But I think that it is much more likely that we have a brand new government very soon and a tidal wave of fiscal stimulus leading to higher interest rates. So again, I really want to run away from a fixed income allocation right now.

If I need to buy income-producing securities, I am looking at preferred stocks which are issued mainly by banks and financial companies that will benefit from higher interest rates. I would also look at building a dividend paying stock portfolio that today can easily yield 3-5% in very high quality companies. And, if my accountant wants the extra work in dealing with annual K-1s, I would look at the higher quality MLPs that are backed by pipelines and other assets that won’t sit idle. Plenty of other places to invest for income and not have to worry about the 10-year Treasury yield rising from 0.8% to double or triple that rate.

Ask Blaine Your Questions: Send your market questions into blainerollins@361capital.com and it may be featured in a future blog.

Read more in our Weekly Research Briefing >