Market Extra: The stock market has already picked the next U.S. president

The GOP is traditionally known as the party of Wall Street, but this year investors, for the most part, are betting against its standard bearer.

“The market appears to have decided that not only [Hillary] Clinton will win, but that it won’t be close,” David Woo, a strategist at Bank of America Merrill Lynch said in a report distributed Monday. “Investors like landslide victories.”

Woo noted that the S&P 500 has risen more than 4% since July 5, which marks the beginning of the 90-trading day countdown to the election on Nov. 8. During years when presidential candidates won by a margin of more than 80% of Electoral College votes, the S&P 500 posted average returns of 8.4% in the 90 days leading up to the election, as this chart illustrates:

The last time stocks outperformed the current rally at the halfway point is when Ronald Reagan won in a landslide against Walter Mondale in 1984.

“To us, this implies that the market is expecting Hillary Clinton to either maintain or increase her already sizeable lead over Donald Trump in the opinion polls,” Woo said, citing the Iowa Electronic Markets, which indicates that Clinton has an 80% chance of beating Trump.

The IEM is a futures market operated by the University of Iowa Tippie College of Business for research purposes.

Earlier this year, Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, noted that the S&P 500 SPX, +0.52%  has a fairly good track record of predicting election results.

Since 1944, the incumbent person or party was reelected 82% of the time when the S&P 500 rose between July 31 and Oct. 31, according to Stovall. The only exceptions were in 1968 and 1980, when there were popular third-party candidates in the picture.

“Whenever the S&P 500 fell in price during these three months, however, it signaled the replacement of the incumbent 86% of the time,” he said.

The latest numbers show Clinton leading Trump in most polls, according to news and data aggregator RealClearPolitics.

The S&P 500 hit a record high of 2,193.81 on Aug. 15, and is poised to extend its rally for a sixth straight month.

Meanwhile, the market is also expecting a split Congress and very little change in policy, according to Woo.

The volatility of the euro-dollar pairing EURUSD, -0.0179% which the strategist views as a good proxy to measure the risk of change in the U.S. versus the rest of the world, is at a 2016 low, implying subdued expectations for policy change.

“The combination of a Democratic president and a split Congress likely means gridlock,” Woo said. “If this scenario materializes, the experience of the past six years suggests there is little chance of a major change in the fundamental economic policies of the most important country in the world in the foreseeable future.”

As a result, investors could expect lower interest rates and a weaker dollar. But in the event the same party wins both the White House and Congress, the greenback will strengthen and rates will rise, Woo said.

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Jeffrey Lipton Barbados

Market Extra: S&P’s new real-estate sector an unnecessary headache, says Laszlo Birinyi

Real estate will become the S&P 500’s 11th sector next month. Market historian and money manager Laszlo Birinyi isn’t applauding.

Birinyi, in a Monday note, characterized the move as aimed more “to the benefit of the vendor and not the customer.”

The move by S&P Dow Jones Indices and MSCI, announced in March 2015, carves 28 real-estate investment trusts and real estate management and development companies out of the financial sector and lets them stand alone as their own sector. Real estate shares will become the S&P 500’s SPX, +0.52%  11th sector sometime in mid September. Mortgage REITs will remain part of the financial sector, which includes banks and insurance firms.

David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a June blog post that the decision reflected growing interest in real estate and REITs (see chart below). Over the years, investors had periodically suggested that REITs were lost amid the banks and brokers and should stand on their own, he said.

S&P Dow Jones Indices

Some investment managers have cheered the move, but have noted it could create short-term volatility.

“From a portfolio management perspective, we continue to view REITs’ elevated sector status as a long-term positive. Potential benefits include increased visibility, a larger investor base and a reduction in long-term volatility,” said Paul Curbo, portfolio manager at Invesco, in a post last week.

The decision is widely expected to bring new attention to real estate in general and REITs, in particular. But Birinyi argued that investors already have plenty of ways to get exposure to REITs as is.

“We have [REIT-focused] ETFs already and they seem to be doing pretty well,” he said, in a phone interview.

The Vanguard REIT ETF VNQ, +0.99% with 151 holdings, was up 16.4% in the year through Friday, outperforming the S&P 500 REIT group by 1.6 percentage points, Birinyi noted. The smaller Schwab U.S. REIT SCHH, +1.04% with 100 holdings, was up around 17%, outpacing the REIT index by around 2.3 percentage points. The S&P 500 index was up around 9% in the one-year period ended Friday.

“In the short term there will likely be more pressure to sell in order that the ETFs conform to the new sector,” he said in the note. “And costs will probably rise as the ETFs will have licensing fees to pay.”

As noted by The Wall Street Journal’s Daisy Maxey earlier this month, the change could be a surprise for some yield-hungry investors when some financial-sector funds cut their stakes in dividend-heavy REITs when the real-estate firms are carved out.

Funds indexed to either the S&P or MSCI financial sector benchmarks will have to remove most of their holdings in the recategorized REITs, the report noted. In response, some fund companies are planning to remove real-estate stocks from their financial funds, while others plan to shift investor money already in real-estate stocks into real-estate funds they don’t currently own. That should boost demand for REIT stocks and REIT ETFs in the near term.

Elevating REITs to sector status effectively creates “more smoke” that will needlessly confuse individual investors, Birinyi said. He took issue with the notion that rising investor interest in REITs merited the move, arguing that investors have also shown growing interest in e-commerce and biotech shares, neither of which merit being broken out into their own stand-alone sectors.

Birinyi compared using real estate’s outperformance with justify creating a new sector to the decision to add iPhone maker Apple Inc. AAPL, -0.11% to the Dow Jones Industrial Average when it was up 966% from the March 2009 bottom. Apple has been the worst performer in the blue-chip index since joining, with a total return of negative 12.9%, according to FactSet data.

Trading at 45 times earnings and up 348% from the 2009 bottom, the sector is “not a compelling purchase,” Birinyi said.

“Our attitude in this issue, as in many others, is that the industry should be simplifying investments, not making them more complicated,” Birinyi wrote.

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Jeffrey Lipton Barbados