Presidential Election Portfolios
Dr. Ludwig Chincarini
In the next couple of months, the United States will either elect Barack Obama or Mitt Romney as the President of the United States for the next four years. Although markets tend to be highly efficient and market prices attempt to anticipate events in advance, the resolution of the uncertainty could ultimately lead to some stocks performing better than others. For example, when President Bush beat Al Gore in 2000, many believed that defense stocks would have a boost. Obviously, September 11, 2001 played a significant role in that, but even before September 11, Lockheed-Martin went up by 18% from November 2000 to the end of August 2001, while the S&P 500 dropped by 14%. Over the entire Bush term, LMT was up by 153%, while the S&P 500 was down 32%. Of course, it would be better to be able to predict which President will win, but even after the President is chosen, it might not be too late to get the right stocks.
So who's going to win, Obama or Romney? Currently, the betting sites have Obama winning the election (InTrade and IowaMarket). Although, one should interpret these with some caution because often times the bettors on these sites aren't very sophisticated. For example, in 2000, these sites strongly held that George Bush would win the popular vote, but he didn't.
Then there are the polls which survey a sample of voters in order to get an idea of who will likely win. Many national polls find Obama ahead (Politico). But this lead diminishes if you look at "likely voters" and becomes within a statistical error term. The Ramussen poll has Romney in the lead (Rasmussen) but also within the margin of error. The Gallup Poll has Obama in the lead (Gallup), but also within the margin of error. Ray Fair, a Yale Economist, uses only a few economic variables to predict the Presidential elections. He has been doing this for many years now and has been right most of the time. His latest results have Obama with a slight lead, but too close to call (RayFair). The majority of polls favor Obama, but are too close to call (AllPolls). This is much different than what we saw in 2008, when Obama had significant leads over McCain. So we're back where we started.
What stocks might you consider a post Obama victory or a post Romney victory? Let's start with the first big issue: dividend taxes. Romney wants to extend the Bush tax cuts. This means that dividend taxes will remain at 15% versus the 39.6%. In addition to this, the Obamacare would make higher income individuals pay an extra 3.8% in taxes on dividends and other passive income (ObamaCareTaxes). Thus, the tax rate on dividends would jump from 15% to 43.4%. On the margin, this could make dividend paying stocks less attractive and investors may begin dumping high dividend stocks prior to and after an Obama victory. So what's a possiblestrategy? If Obama wins, one might consider the possibility of selling high dividend paying stocks (he could add a link here for our readers to pull up research reports indicating which stocks are high dividend paying)and portfolios of stocks and if Romney wins, consider if it’s within your investment strategy to buy them.
What about healthcare companies? There are arguments pro and con to holding healthcare. With Obama, health care companies will have higher costs, but they will also have more customers. Various analysts have disagreed on whether health care will be better or worse under Obama, thus, I would eliminate this from consideration (for more analysis on healthcare, see Stovall's report on September 4, 2012).
A Romney win could help oil companies. Big banks may do the same under both, but more small banks and mid-size banks might do better under Romney, since excessive regulation will be likely curtailed. Defense stocks could do better under Romney as well. Steel and Coal companies may also do well. A Romney win might also help private equity companies due to the carried interest debate. Two companies that are publicly traded private equity firms are Kohlberg Kravis Roberts & Co. and The Blackstone Group. Investors should perform due diligence to assess which securities fit your investment and risk objectives.
An Obama win could help relatively more home related stocks, renewable energy companies, and gold. Ironically, gold might go up, because there may be a lack in conviction in Obama's ability to turnaround the economy and the fear of further stimulus.
Whomever you vote for and whatever investment you make, think about taking a small position based upon who actually wins the presidency.
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Dr. Ludwig Chincarini
TradeKing All-Star Commentator
Author of The Crisis of Crowding
Disclosure: No positions in any stock mentioned
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