With the recent rise in Donald Trump's poll numbers, Wall Street is starting to contemplate the prospect of a better-than-expected Republican Party showing on Election Day.
"It's incredible to see how much the US election has changed in recent weeks," Strategas' Daniel Clifton wrote in a report to clients Thursday.
"The FBI report of new emails from Hillary Clinton's private server has turned the election from a referendum on Trump to a referendum on Clinton. ... In our meetings this week in NY and Boston, it was clear to us that investors are not prepared for a Republican sweep."
A month ago, investors were bracing for a scenario of a Democrat sweep where that party win the White House and win back both houses of Congress. Now, it seems extremely unlikely Republicans will lose the House, and Senate control has become a toss-up, according to the latest polls.
The firm put together stock portfolios for each party based upon which companies stand to do best if a particular party is in power. Using the relative performance of its Democratic versus Republican baskets, Clifton now projects Trump has a 42 percent chance to win the presidential election, which is higher than the betting markets' odds of about 30 percent.
Source: Strategas
In addition, Clifton cited how the three-month performance into Election Day was a good historical predictor for the incumbent party's re-election chances. If the market is up, the incumbent party is likely to win and vice versa, according to the indicator. This model was correct for 19 out of the past 22 presidential elections. Since Aug. 8, he noted how the market is down about 4 percent, which points to a Trump victory using history as a guide.
Clifton said a Republican Party in power at all three branches of the government will be positive for pharmaceutical, biotech, energy companies, defense and financial companies.
On pharmaceuticals and biotech: "An all-Republican government would relieve the pressure on biotech and pharma companies as drug pricing changes would be unlikely," Clifton wrote.
On energy: "Republicans will renew support for fossil fuel development including drilling and fracking. Most importantly, however, the 20+ stalled pipeline infrastructure projects could be restarted almost immediately," he wrote.
On defense: "Defense spending will go up no matter who wins, but with an all-Republican government Defense will see more of an increase," he said.
So how should investors position their portfolios if the Republicans sweep?
Here is a selection of seven stocks that made the Strategas 'Republican Sweep Portfolio.'
