Obama vs. Romney: Political Investing

For investors trying to play the election game, the rules just got a lot more blurry. With less than two weeks before voters head to the polls, President Barack Obama and Republican challenger Mitt Romney are neck and neck, making it hard for investors to make their portfolio plays based on who will occupy the White House for the next four years.

Historically, Wall Street rises leading up to an election, according to Sam Stovall, chief equity strategist at S&P Capital IQ. He said that the economy, stock prices and corporate earnings post stronger growth during Democratic administrations compared with Republican ones. Since 1900, both parties have had six stretches of presidency with the S&P 500 rising a median 12.1% under a Democratic White House and 5.1% under the GOP.

“Since 1900 whenever the market rose from July 31 until Oct. 31 the incumbent was re-elected 80% of the time, when the market fell in that three-month period a new president was named 88% of the time,” Stovall said. He noted that Wall Street often rallies in November and December when an incumbent is re-elected, and if a new president takes office, stocks historically decline in November but rally in December for a net gain.

“Typically the fourth year of a presidential term tends to be good for stocks,” explained Charles Rotblut, vice president at the American Association of Individual Investors & AAII Journal editor. “The party in office tends to release economic stimulus and programs that will boost the economy to make voters feel more favorably toward them, but that really hasn’t happened this year from this administration. What’s unusual with this election is that we’ve had a good market but it’s not because of action from Washington.”

Both candidates have made sweeping promises on the campaign trail, but their policies once in office don’t always become reality. For investors re-examining their portfolios to benefit from whoever takes the White House, there are some sectors expected to rally, depending on who wins.

Potential Winners of an Obama Re-election

Alternative/Renewable Energy: Obama has been a bigger supporter of regulations reducing CO2 emissions and encouraging renewable energy, so Stovall expects stocks related to renewable energy like solar, hydro-geothermal and wind to do well if he is re-elected.

Natural gas plays could also experience a boost with the administration pushing for it as a transportation fuel. “An Obama White House could bring more federal subsidies for solar-related projects,” said Stovall.

Telecom: The Obama administration has extended government subsidies to increase broadband expansion, which could lead to a rally for the sector.

“Even though high-yielding stocks are likely to be hit with higher tax rates for dividends, telecom would be on the Democratic side,” said Stovall. He also said the industry could get a boost from the administration’s Lifeline pre-paid telecom services plan for Medicaid and food stamps recipients.

Homebuilders: Through programs like the Home Affordable Modification Program (HAMP), the White House has been working to delay and curb foreclosure, giving delinquent homeowners more time to work with their lenders.

“Keeping people in their homes reduces the supply of existing homes for sale, which means people will turn to new home sales,” said Stovall.

Potential Winners of a Romney Election

Defense: “The Obama administration has called to limit growth in defense spending,” said Rotblut , while Republicans tend to favor increased national security.

In the first presidential debate, Romney promised to increase Navy warship spending and ramp up the creation of new weapons system. The governor has also pledged to stop $500 billion in defense budget cuts set to hit on Jan.2 if the budget deficit isn’t fixed.

Coal/Railroads: “A Romney victory carries the feeling that coal companies and coal-fired utilities and railroads might benefit from the easing of C02 restrictions,” said Stovall. Romney has said on the campaign trail that he would work to alter some of the Environment Protection Agency’s regulations.

“We’ve really seen coal drop off because of some of changes in regulation under the [Obama] administration and the cheapness of natural gas,” said Kim Caughey-Forrest, senior equity analyst at Fort Pitt Capital Group.

Piggy-backing off of the potential increase in coal production under a Romney presidency, the railroads are also expected to get a boost since, according to Stovall, 30% of railroad volume is directed toward the transportation of coal.

“Obama has put strict regulations on coal, we have seen electric utilities convert from coal to natural gas and that impacts railroads, particularly those that did a lot of coal volume. We’ve seen them struggle this year in part on lack of coal,” Rotblut added.

Oil Drillers: While Obama has increased permits for domestic drilling, Romney’s five-point plan includes oil independence with a significant boost to domestic oil production, ending the clean energy loan program and expanding drilling.

Draw

Health Care: A Romney victory would be bring uncertainty to the sector since he said he would work to repeal and rebuild The Patient Protection and Affordable Care Act.

“Health care will rally under Obama because most people say they would prefer not unscramble this egg of the health-care plan,” said Stovall. “I think that health care is doing well right now because the market expects the president to be re-elected.”

He added the insurance industry could get a boost when more people become eligible to sign up for coverage in 2014, as will hospitals and ambulatory care centers.

A Romney White House might help medical device makers if the 2.3% excise tax is repealed and drug companies could advance if his administration doesn’t push hard to negotiate lower prices, according to Rotblut .

Financials: Stovall said the nation’s largest banks would continue to do well no matter who occupies the White House.

“The Republicans are regarded as being more fiscally conservative and less inclined to increase regulation which could be good news for smaller and mid-sized banks,” said Stovall.

However, Forrest said Romney’s pledge to replace Federal Reserve Chairman Ben Bernanke could hurt banks’ recovery balance sheets.

“The change at the Fed would probably bring a change to the zero-interest-rate policy that has been driving banks….this is how they’ve been rebuilding their balance sheets. The question would then be: can they stand on their own without this policy that has been re-inflating their balance sheet?”