It is every pundit’s favorite time of the year. The presidential election is coming up, and pundits (aka analysts) are predicting which stocks will do well if Barack Obama or Mitt Romney wins. This can be best categorized as Mitt Romney or Barack Obama stock picks. However, there are many problems with this type of investing (speculating is a better name). Value investors know this is obvious, but there is even more than meets the eye.
The first problem with election investing is determining who will win. A few weeks ago, every pundit stated that Barack Obama had won the election. Some headlines:
Clint Carlson's Carlson Capital Double Black Diamond fund returned 3.34% in August net of fees. Following this performance, the fund is up 8.82% year-to-date net, according to a copy of the firm's August investor update, which ValueWalk has been able to review. On a gross basis, the Double Black Diamond fund added 4.55% in August Read More
Gun sellers prepare for Obama reelection surge
Politico (blog)-Sep 17, 2012
Obama Administration is the Second Term Jimmy Carter Never Had
PolicyMic-Sep 18, 2012
The Democrats Reagan; What Obama will Achieve in his Second term
Cover of Newsweek Sep 24, 2012
In just a few weeks, the picture has changed dramatically. Mitt Romney and Barack Obama are running neck and neck in almost every single poll. Mitt Romney surged in the polls after his defeat of Barack Obama in their first debate. There are factors that people can predict and events which cannot be forecasted, such as terrorist attacks, natural disasters etc. No one knows what will happen in the next few weeks which might impact the results of the election. Even assuming nothing happens out of the ordinary, I am skeptical of anyone who is able to predict who will win a race which is now to close to call.
Since no one knows who will win the election, how can someone ‘invest’ based on the winner? This is a (non-fun) form of gambling at best. However, lets assume speculators can hedge or buy stocks, regardless of the outcome (another stretch), would this really help?
I recall companies like UnitedHealth Group Inc. (NYSE:UNH) and Humana Inc. (NYSE:HUM) back in 2010. The companies had pristine balance sheets, but their short term bonds were trading at 80 cents on the dollar, due to fears over The Affordable Healthcare Act, AKA Obamacare. The bonds had a coupon of approximately 7%. The reason why UNH HUM and other healthcare bonds had depressed prices, was a fear over the future of these companies. These fears were proved false, and both the stocks and bonds have rallied. Now, many healthcare stocks are viewed as favorable for a Barack Obama victory.
Let us start out with a recent report from Credit Suisse on the issue. They note:.
Leveraging our Public Policy experts in Washington D.C., we first outline key issues for this election, alongside of both candidates’ stances. Our sector analysts reflect on the significance of these issues and the extent to which the impact of either party winning is factored into current prices.
These are just assumptions, who says these industries will do well under Mitt Romney or Barack Obama?
I am not a big fan of studies on how the stock market does when certain parties control the house or presidency. The main reason being that the data is skewed, as I mention in this article. The main points discussed in their article include:
1 the stock market is not efficient
2 valuations and PE drive market returns, not politicians
3 The stock market is a leading indicator i.e. stocks bottomed in March 09 on news that Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC) had produced a profit in the first two months of the year. This started the rally, which likely would have continued regardless of the election winner.
4 What year you start with makes a huge difference
5 Results are not always adjusted for inflation
However, lets assume that is false, and certain sectors will do better under a President Obama or President Romney. These forecasts are only based on policy, NOT on history. There is a big difference between the two, don’t believe me? Lets look a bit more.
Many believe that Mitt Romney will be better than Barack Obama for financials. XLF is up approximately 40% since President Obama took office. IYF is up 42%, Goldman Sachs Group, Inc. (NYSE:GS) almost 50%, JPMorgan Chase & Co. (NYSE:JPM) 63%.
Energy stocks are interesting, this is what Credit Suisse Group AG (NYSE:CS) says:
If Obama Wins
The Federal agencies are likely to continue erring on the side of caution, with regard to drilling permits. We hope our U.S. production forecasts represent an extension of the status quo. Further delays to Keystone XL would be negative for sentiment toward the Canadian pure play oil sands producers. Higher taxation would likely be focused on LIFO-FIFO or foreign tax credits, rather than drilling incentives, with a proportionally larger impact on the Integrated/Refining sector. However, forecasting the outcome of the taxation debate is murky to say the least.
If Romney Wins
We would expect some acceleration in the pace of drilling. This would likely target oil and/or liquids-rich plays. This could increase the amount of associated gas volume growth, requiring incremental gas demand as an offset. It is likely that natural gas use could be promoted as a cleaner, domestic alternative to other fossil fuels. A faster pace of development and exploration activity in the Gulf of Mexico could also benefit the offshore service sector.
Credit Suisse states that solar stocks that would benefit most from a Barack Obama victory and the presumptive continuation of existing incentives include FSLR, SPWR, WFR, and YGE, due to their higher exposure to the United States, in addition to a smaller benefit for China manufacturers GCL-Poly Energy Holdings Limited. (HKG:3800), Trina Solar Limited (NYSE:TSL), Suntech Power Holdings Co., Ltd. (NYSE:STP), Canadian Solar Inc. (NASDAQ:CSIQ), Hanwha Solarone Co Ltd (NASDAQ:HSOL), JinkoSolar Holding Co., Ltd. (NYSE:JKS), JA Solar Holdings Co., Ltd. (NASDAQ:JASO), and ReneSola Ltd. (NYSE:SOL). Solar polysilicon, wafer, cell, and module manufacturers in other regions would also benefit to a small degree from potential higher demand from a Barack Obama victory.
Additionally,Credit Suisse notes LED Incentives: Congressional Republicans have blocked enforcement of an efficiency mandate for general lighting that would encourage LED adoption. Energy efficiency projects have benefited from tax credits and support from the stimulus. Both Cree, Inc. (NASDAQ:CREE) and Veeco Instruments Inc. (NASDAQ:VECO) have benefited from U.S. R&D grants. LED chip and system manufacturer Cree, Inc. (NASDAQ:CREE) may benefit most from an Obama victory, due to high U.S. exposure. Veeco Instruments Inc. (NASDAQ:VECO) and GT Advanced Technologies Inc (NASDAQ:GTAT) sell manufacturing equipment largely to Asia, and would benefit to a smaller degree from an Obama victory from possible higher end demand for LEDs in the United States.
Really? Has this historically been the case? Will oil stocks truly do better if Mitt Romney wins? Assuming my assumptions are correct, I have reason to believe this is 100% false. Oppenheimer has data going back to 1988 to back up my claim.
In the past 24 years, the White House was occupied 12 years by Democrats and 12 years by Republicans. The compounded average annual change in the iPath S&P GSCI Crude Oil Total Return (NYSEARCA:OIL) was 9% under Democrats and 7% under Republicans.
One example of a specific stock, Exxon Mobil Corporation (NYSE:XOM), which has gained more under Democratic (10% annualized) than under Republican presidents (7% annualized).
I wish I had data on other sectors and more stocks, however, if oil stocks do better under Democrats, it would not be surprising, if financials, Defense, mining etc did better under Democrats. Likewise, perhaps green energy, Illumina, Inc. (NASDAQ:ILMN), Life Technologies Corp. (NASDAQ:LIFE), Thermo Fisher Scientific Inc. (NYSE:TMO), Waters Corporation (NYSE:WAT), CVS Caremark Corporation (NYSE:CVS), Rite Aid Corporation (NYSE:RAD), Walgreen Company (NYSE:WAG) and Cabelas Inc (NYSE:CAB), which Credit Suisse Group AG (NYSE:CS) expects to do better under Barack Obama, have done better under Republican administrations.
In fact, it is possible that the contrarian view is the one more likely to prevail. It is foolish to be a contrarian for the sake of being a contrarian, but consider this fact…..
According to Bloomberg, Venezuelan stocks are up 209% this year, while Government debt has provided investors a 3x return. This all occurred during the reign of the authoritarian socialist leader, Hugo Chavez.
Perhaps the red and blue should be reversed in the Credit Suisse Group AG (NYSE:CS) chart at the top of this article. I am not picking on Credit Suisse. These types of articles are rampant pre-election.
I cannot predict the future, and have no idea who will win the election, nor how the stock market will do. Nor do I think the next President’s policies will drive markets as much as valuations. It is even harder to narrow down specific sectors or individual stocks to Mitt Romney or Barack Obama.
To ‘play’ the election, speculators must assume all of the following are true:
1. They can predict who can win the election
2. Returns will be driven by the President
3. The returns will be based on policy and historic data is meaningless.
I doubt people can affirm the above three statements, and therefore, advise people to avoid this type of speculation.