With Election Day Approaching, Here’s How to Navigate Market Uncertainty With less than three weeks until Election Day, investors are collectively bracing for impact as the typical volatility surrounding this time begins to make its first waves. So, this week, let’s take a closer look at some of the candidates’ proposals that are at stake for this election – in particular, if Trump wins. Next Thursday, we’ll take a look at a Harris win. More importantly, we’ll examine how the results of either win could impact your investments – starting with what the stock market is signaling about the potential outcome. Dow Trends in Election History Tallying the election results could bring significant challenges (both literally and figuratively) and plenty of uncertainty. However, according to the venerable 100+-year-old Dow Jones Industrial Average, we may already have a clue to who the winner might be. According to research from the Leuthold Group, as reported by Barron’s, a longstanding rule of thumb suggests that if stocks rise in the three months before Election Day, the incumbent party usually wins. 
In fact, the direction of the Dow in the 11 weeks prior to Election Day has correctly signaled whether the incumbent party wins the White house in 22 out of the last 24 elections – dating back to 1968! Quite simply, if the Dow is up during the last 11 weeks till Election Day, the incumbent party wins the White House 92% of the time. And this year, the 11-week countdown clock started the week ending Aug. 23. Since then, the Dow is up more than 4.5%. Granted, the sample size is very small, with just 22 Presidential election years under review. However, it may take either a big market drop over the next few weeks or a rare upset in this indicator for Donald Trump to prevail on Nov. 5. But setting aside these interesting but uncertain indicators, the Election Day outcome is likely to have a big impact on business and the economy in at least three areas: - U.S. trade policy…
- Federal regulation…
- And immigration.
Of these three areas, trade policy may have the biggest immediate impact on the economy and your investments. So, let’s take a closer look. Impact on Key Sectors: If Trump Wins On the campaign trail, Trump has floated several tariff ideas, including a 10% tariff on imports from all our trading partners and a 60% tariff on imports from China. This would be an extension of the trade tariffs from Trump’s first term. Historically, higher tariffs would likely give the dollar a boost, including the period following the implementation of the Trump tariffs in 2018-19. Tariffs would also create a headwind for corporate profits. It’s especially a drag on the earnings of companies that do big business internationally because a stronger buck can hurt international sales and profits. And if our trading partners retaliate with trade tariffs of their own, it can put even more downward pressure on international sales and profits of big U.S. stocks. 
As shown above, the sectors most likely to feel the biggest negative impact on profits include Technology (with 59% international sales), Materials (47%), Energy (36%), Industrials (32%), and Communications (30%). Each of these sectors earns more than 30% of sales internationally. So, stocks in these industries are most vulnerable to declining profits – should higher tariffs come to pass. Trade tariffs represent a sudden shift higher in price levels, especially for imports. That could boost inflation once again, just when the Fed thinks it’s licked. Higher tariffs could also hurt consumer spending, which accounts for 70% of U.S. economic growth. And the combination of price inflation, plus a slump in the economy could result in the dreaded stagflation scenario from the 1970s and early 80s. So, in a Trump victory scenario, domestic-oriented stocks and sectors – especially quality stocks in defensive sectors – might be your best bet in case stagflation returns. This list would likely include big banks and financial stocks, which may also benefit from less regulation in a second Trump term. Additionally, domestic homebuilders and suppliers, plus consumer staples and healthcare, are also sectors that could get a boost. So should small-cap stocks, which tend to generate most of their sales and profits domestically. And above all – quality stocks. Quality is the best performing factor during bouts of stagflation in the past, outperforming the S&P 500 index by more than 10% annually! In July, I shared a stagflation-themed TradeSmith stock screener, and now is a good time to revisit it. It’s a simple but powerful screener that includes just five key filters. Simply log into your TradeSmith Finance platform. Click on the Invest tab from the main menu, then the Screener, and then click + Create new screener. If you don’t see the Screener in your TradeSmith Finance dashboard — and would like to — call 888-623-0858 to discuss. Finance dashboard — and would like to — call 888-623-0858 to discuss. Next, simply add these simple but powerful filters: - Health Status: Green or Yellow zones
- Trend: Up
- Markets: S&P 500 and S&P 600 to cover large and small caps, respectively
- Business Quality Score: More than 80
- Free Cash Flow Yield: More than 3%
Here’s a screenshot of the screener with filters: 
The two filters that work best in helping you uncover quality and defensive stocks are without doubt, Business Quality Score (BQS) and Free Cash Flow Yield (FCF yield). So, let’s briefly review both indicators. BQS ranks every stock in our database by four quality factors, including: - Growth…
- Profitability…
- Safety…
- And payout.
Our TradeSmith algorithms calculate the quality score for each stock compared to its own history and relative to all other stocks in our database. And we rate every stock on a scale from 100 (highest quality) down to 0 (lowest). Free Cash Flow (FCF) is how much money a company has left over after paying its operating costs and capital expenditures involved in maintaining and growing its business. And Free Cash Flow Yield is simply a company’s total free cash flow (trailing 12 months) divided by its enterprise value (the total of equity + debt capital). It’s expressed as a percent, just like dividend yield, and in the same way, higher is better. For my money, I prefer to compare stocks by FCF yield rather than the more traditional Price/Earnings (P/E) ratio. That’s because the earnings in P/E ratio is much easier for accountants to manipulate than cash flow. I find it a truer measure of a stock’s real worth. And a high FCF yield indicates a stock is likely to outperform the market, just like BQS. I prefer to use these two powerful and predictive filters in combination. For this screener, I set the BQS to more than 80, ensuring the resulting stocks will therefore be in the top 20% of all stocks we rate for quality. I set the FCF yield filter to more than 5%, which is about twice the average for S&P 500 stocks, and then I sort results by Free Cash Flow Yield descending, meaning the highest yield is at top. Forty stock results passed all my filters. Due to limited space, here’s a sample of my top 15 results. 
There are quite a few Financial and Health Care stocks near the top, as I would expect to see in a stagflation screener. Also, plenty of Consumer Discretionary and Communication stocks made the cut. Finally, about three-quarters of the list are small-cap stocks, those with market caps between $1 billion and $7 billion. This screener is saved for Platinum members to access – and you can easily replicate it yourself. Try including more TradeSmith exclusive, general, and/or fundamental filters to focus your list of results and make this screener your own. Mike Burnick’s Bottom Line: Keep in mind, stagflation doesn’t have to be the only election outcome from a Republicans win. But with higher tariffs likely in that scenario, this screener can help you quickly find high quality, defensive stocks. I’ll follow up soon with another column to cover more potential stock market winners and losers depending on the election outcome. Stay tuned. Good investing,  Mike Burnick
Senior Analyst, TradeSmith P.S. As Election Day approaches, market volatility is in full swing, and investors are anxiously awaiting a definitive outcome. But that’s even more reason to stay vigilant in our investments. Amid this uncertainty lies a pressing opportunity that could be too good to overlook – one that could potentially double your investment. Louis Navellier, one of our Senior Analysts at our corporate partner InvestorPlace, predicts that AI stocks haven’t yet hit their stride — and even bigger, more monumental shifts are on their way for the sector. Louis has accurately identified major financial booms before they unfold, using a time-tested strategy rooted in the earliest computer labs of the ’70s. This is how he predicted this year’s impressive bull run, allowing savvy investors the chance to secure returns of six times their money on a single stock he recommended. And right now, the market is fixated on first-generation AI stocks, but Louis believes the real opportunity lies in the next generation. With a staggering projected market growth to $15.7 trillion by 2030, the next phase of AI is coming fast. So, don’t wait – click here for full details on how to position yourself before this significant market shift unfolds. | 
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