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Goldman: It's looking like a 'wave' for Democrats, and that could be bad for stocks

Prediction markets are implying a strong likelihood that Hillary Clinton will win the White House, her fellow Democrats will take the Senate and the party will make strong House gains in November's elections.

With those predictions pointing to a "wave election" on the horizon, Goldman Sachs clients have been asking for advice on what to expect for US equities, according to a note from David Kostin, the bank's chief US equity strategist.

Defining a "wave" as when one party "registers large congressional seat gains and has the potential to implement policy changes," Kostin's team found that the future may hold some losses for stocks.

"Since 1932, six elections have met these 'wave election' criteria and the S&P 500 typically fell by 2 percent and 4 percent during the subsequent one and three months, respectively (falling in four out of six cases)," the note said.

For comparison, the 15 other presidential elections during that time period saw a median return of 0 percent and 6 percent in the following one and three months, respectively.

Among their recommendations for how to ride a Clinton "wave," the Goldman team suggested buying health care equipment and services companies while selling pharmaceutical and biotech firms. The equipment and services industry has shown a statistically significant relationship with changes in presidential election odds, Goldman said, and Clinton's policies on drug pricing are counter to the interests of pharmaceutical companies.

Goldman also recommended owning firms with high government sales (infrastructure spending will likely increase) and those that own large amounts of overseas cash (as corporate tax reform may be on the horizon).