Looking past October’s Tricks to November’s Treats

Pay attention to these four industries heading into midterm elections.

Investor angst over the sustainability of earnings growth and the impact of trade tensions has pummeled equity markets. The upcoming midterm elections and their aftermath represent another catalyst that should be on investors’ radar, we believe. Taking a step back can be a good exercise. The S&P 500 Index has risen 27% since the 2016 elections, with big moves at the industry level as investors anticipated regulatory and political catalysts driven by a one-party hold amongst the executive and legislative branches.1

The October sell-off now brings the S&P 500 valuations down to a more reasonable 14.8x price to next year’s calendar earnings multiple–the lowest level in over 2 years.As attractive valuations are an effective tool to bring investors back to the table, the following industry groups may be in focus as investors look past midterms to the end of the year.

looking past octFinal

Aerospace & Defense

Military spending has been a key priority for President Trump’s administration: the Department of Defense (DoD) has increased its spending by 9% in 2018 from the prior year.2 In addition, the 2019 National Defense Authorization Act was passed at its swiftest pace in 20 years, up to $717 billion (a 12% increase from 2017).2 Even after the 13% quarter-to-date decline in the Dow Jones U.S. Aerospace & Defense Index (as of October 29th), the industry group is still up 46% since 2016 Election Day and remains the purest way to play any change in defense spending outlook.

Healthcare

Drug pricing should remain a key issue post Midterm elections. Healthcare has fared well in the past year, benefiting from a defensive rotation by investors and strong corporate earnings growth. In the second half of 2018 since June 30, the industry has rallied 4.6%, joining other perceived safer haven equity areas such as Consumer Staples 6.4% and Utilities 6.3%.3 Valuation concerns have been addressed as forward P/Es have been reduced to ten-year lows. Additionally, investors have been digging even deeper to gain exposure to longer term trends such as Medical Devices, which at 16.8% year-to-date are handily beating both the sector and the broad S&P 500.3

icon-pointer.svgSee more here for our latest views on healthcare.

Infrastructure

Infrastructure represent both an opportunity and a promising area of political consensus. Policymakers from both sides of the aisle have come to realize the need for U.S. infrastructure spending given recent reports indicating the U.S. has the largest infrastructure estimated spending gap in the world over the 2016 to 2040 period.4   While differences on how to fund infrastructure spending bills remain, a bi-partisan solution can be a catalyst for this industry group.

icon-pointer.svgSee more here for our latest views on infrastructure.

Bottom line

Looking beyond the noise can be a useful exercise heading into 2019. Taking industry-level views can be a useful way to play post-Midterm election market trends, with the tailwind of more favorable valuations providing an opportunity for investors.

Related Funds

ITAiShares U.S. Aerospace & Defense ETF

IYHiShares U.S. Healthcare ETF

IHIiShares U.S. Medical Device Companies ETF

IGFiShares Global Infrastructure ETF

IFRAiShares U.S. Infrastructure ETF

Chris Dhanraj is the Head of the ETF Investment Strategy team in iShares and a regular contributor to The Blog.

Footnotes:

  1. Source: Bloomberg, as of 10/29/2018.
  2. Source: U.S. Department of Defense, as of 8/1/2018.
  3. Source: Bloomberg, as of 10/29/2018. Notes: The sectors are being represented by the S&P 500 Consumer Staples and S&P 500 Utilities indexes. Medical Devices are are represented by the Dow Jones U.S. Select Medical Equipment Index.
  4. Source: World Economic Forum, the Global Competitiveness Report 2016-2017. Notes: According to the report, the U.S. currently has the largest infrastructure spending gap in the world over 2016-2040, forecast to be $3.8 trillion.

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Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

 This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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