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Investing, Stocks  | October 5, 2020

With President Donald Trump testing positive for coronavirus just over a month away from Election Day, an already contentious race has gotten more complex. Raymond James walks through how the various scenarios would play out for consumer stocks.

Analyst Tavis McCourt notes that the next four years will have crucial implications for potential tax rate changes, the U.S.-China relationship, minimum wage, and the continuing federal response to Covid-19—among many other aspects that affect consumers.

He notes that historically, “the consumer discretionary sector has performed better under Democratic administrations with consumer staples performing better under Republican administrations,” but notes that this reflects economic trends, rather than specific policies. With the U.S. poised at the beginning of a recovery, he says “the consumer discretionary sector is positioned to outperform the more defensive and interest-rate sensitive consumer staples sector” over the next one to three years. However, it’s worth noting the results of the election itself could partially determine the speed of the economy’s recovery.

In a Democratic sweep, McCourt believes that a push for higher corporate taxes and higher minimum wages would be a headwind for many companies, but broader fiscal support for consumers would boost spending (and potentially inflation). In this scenario, he favors companies like Target (ticker: TGT), AutoZone (AZO), Costco Wholesale (COST), Dollar General (DG), McDonald’s (MCD), Under Armour (UAA), and Nike.

If Democratic nominee Joe Biden wins, but Congress remains divided, the analyst says there is an increased chance of regulation, but “meaningful tax/wage legislation is much less likely, as is additional fiscal support.” That would likely lead to a slower recovery in consumer spending and lower interest rates for longer. He thinks Dollar General could still be a winner here, along with Dollar Tree (DLTR), Walmart (WMT), Home Depot (HD), and Estee Lauder (EL).

Finally, if Republicans retain the White House and Senate, leading to more of the current status quo, McCourt is looking for “an even more contentious relationship with China, which may impact some consumer companies.” But overall, he thinks cost structures would likely remain the same, and there could be some additional fiscal support to aid in the economic recovery. His favorite stocks in this scenario are Dollar General, Walmart, Best Buy (BBY), Lululemon Athletica (LULU), and American Eagle Outfitters (AEO).

Barron’s also predicted this summer that dollar stores, especially Dollar General, were winners, regardless of the economic outcome.

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