According to some market pundits, if Trump wins, we could see a 5-10% immediate drop (akin to Brexit reaction) and then a possible recession later in the year. On the other hand, if Hillary wins, the market would likely see a sharp rally as a sign of relief and then back to what it has been doing the past year or so (i.e. modest growth).
Stock market does not like surprises and Trump win would be a surprise to the market and why these pundits think there will be an initial selloff if Trump wins.
With such a close race, either candidate can win the election. So how do you invest in such an environment?
My plan is to hedge for both scenarios as I think either candidate has a good chance to win the election. I want to be able to make money in market regardless of who wins by using market's reaction to my advantage.
If Trump Wins
If Trump wins, I want to be able to buy blue chip stocks such as JNJ, PG, KMB, HON, and a few others at 5% or more discount right after the election. These are boring dividend paying blue chip stocks that have been pushed into an overpriced territory for the past year or two by yield hungry investors.
I already own most of these stocks at cheap valuation before they became overpriced, but have been patiently waiting for them to fall back to earth so I can buy more of these great American companies. This election will likely provide me that opportunity.
But what if market falls below 5% or worse we go into a recession as the experts are predicting?
Well, this is why I am only going to buy blue chip stocks that have weathered multiple recessions in the past and have always bounced back while paying and even increasing dividends during recession. I invest long-term and for dividends; therefore, recession will only provide me even better pricing on these quality companies.
Also I buy stocks using dollar-cost-average method where I would only buy a quarter of a position at first 5% drop, then another quarter at 10%, and keep adding at each 5% downward movement till I reach full position in a given stock. This allows me to capture multiple price points and bring the average cost down.
If Hillary Wins
For Hillary's win, I have started to buy high quality dividend paying stocks now that are already at deep discount. I don't expect these stocks to go down any further after the election or by much as they are already at a bottom or trading at a very low valuation. In the case of Hillary's win, these stocks will likely go up as the overall market rises.
I don't want to wait till after the election to start buying these dirt cheap stocks as they may not be that cheap by then. I want to at least start a quarter or half a position now and then pickup the rest after the election. In case Trump wins, I would be able to buy these stocks even cheaper, but again I don't believe these stocks will go down by that much.
Here are the stocks I have started to buy in anticipation for Hillary's win:
PPL Corporation (ticker PPL) - A large cap utility holding company and through its subsidiaries, PPL delivers electricity to customers in the UK, Pennsylvania, Kentucky, Virginia, and Tennessee. It also delivers natural gas to customers in Kentucky. In the current market environment of absurdly expensive utility stocks trading at PE of 20+ multiples, PPL is trading under a PE of 15 while shelling out a very nice dividend of 4.5-4.6%. Management also expects to increase dividend by 4% starting next year. The main reason why PPL has been trading this cheap is because of Brexit and cheap Pound. PPL derives over 60% of its revenues from UK operation.
A recent ruling by the U.K. High Court concerning Brexit has ruled that the U.K. government must pass a vote in the country's parliament to trigger Article 50 (legal initiation of Brexit process). This means a hard Brexit is likely not going to happen. A hard Brexit is where U.K. would lose all access to EU markets, a dire situation for U.K. economy and currency. With this new ruling, a hard Brexit is out of the picture now, and as a result pound has started to recover and so has PPL share price.
I bought my quarter position in PPL before the ruling and a quarter after. Stock is still pretty cheap and I will likely buy more after the election.
Abbvie (ticker ABBV) - A biotech company and my only investment in biotech sector. It is a dividend aristocrat that has been paying and increasing dividend for at least 25+ years. The company's stock is down by almost 20% from recent highs due to concerns regarding heavy revenue concentration in a single drug Humira and threats from biosimilars (generic brands).
I am not too worried about these concerns as it would take years for biosimilars to make a dent in Humira's sales and there are other drugs in the pipeline that Abbvie is working on. I believe the stock is super cheap trading around a PE of 12 and provides an excellent entry point with a nice dividend of 4.6%. I bought have half a position now and will by the rest after the elections.
Welltower (ticker HCN) - This is a blue chip REIT. I've owned shares in Welltower for a while now, but have been wanting to add more.
I understand the interest rate hike is imminent in December, but it is a well advertised and anticipated event and should already be built into the REIT's stock price.
For this reason, Welltower's stock is already trading at a cheap P/FFO multiple compared to some of its peers and with a >5% yield. Also, I could not find any other blue chip REIT currently yielding over 5%.
Therefore, I don't expect much downward pressure on this quality REIT due to upcoming interest rate hike or even election as the stock price is already at cheap/fair valuation and supported by a generous yield. As a result, I recently bought more shares of it.
Of course, I could be wrong, but even if I am wrong and the stock price takes a hit after election or a rate hike, I would still be sitting on a high quality REIT earning >5% dividend.
AT&T (ticker T) - This Company needs no intro. It's a blue chip of blue chip companies and also a dividend aristocrat. An American communication and now a technology giant. It is also one of the biggest positions in my portfolio with a yield on cost close to 6%. I added more shares of AT&T due to a recent 15%+ decline in its share price due to its announcement of merger with Time Warner. Time Warner is one of the largest media content providers that owns HBO, WB, TNT, CNN, and several other popular television and media networks. The merger will transform AT&T from a largest wireless provider to one of the major players in the media content industry.
With a PE of well under 15 and dividend in access of 5%, I couldn't pass on the opportunity to add more of T into my existing and one of the largest positions.
Market is very nervous and as of last Friday has been down for straight nine days and is currently down 5% from its recent highs. This is the longest losing streak for S&P 500 in 30 years and provides me with an opportunity to start buying into index funds.
Therefore, come Monday and just a day before the election, I plan to buy additional shares of my favorite Index ETFs and Mutual Funds in my retirement account to take advantage of the current pre-election dip and upcoming potential rally if Hillary wins. In case Trump wins, I would buy more using dollar-cost-average as the market heads down.
So that's my plan and how I am hedging for the election next week. BTW, I have already voted, thanks to the mail-in ballot in Oregon. Don't forget to vote!
How are you preparing your investments for election? Are your investments ready for Trump or Hillary's presidency?
Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Please use your own judgment or seek a licensed financial advisor before investing. You, the reader, bear responsibility for your own investment and financial decisions.