With a little less than a month left before the U.S. presidential elections, clients have been calling me to ask how they should position their investments for the various outcomes and what impact the winner will have on the economy.
While I certainly have an opinion of what has the potential to be a good investment depending on who wins, I also tell my clients that a lot can happen in a month and that I think it's too early to start placing bets. I tell them that I would wait until right before the election if it's clear who will win, or wait until after the results are in if it's close.
That being said, there is some fascinating data on one way to invest based on the winner.
Follow the money
One approach to trying to capitalize on whoever wins is to track corporate donors. Jonelle Marte has an interesting article in SmartMoney.com that explains the strategy: "A report released last fall by researchers at the University of Innsbruck in Austria looked at the stock market performance of the top contributors for U.S. presidential elections from 1992 to 2004 and found that a hypothetical portfolio of the 30 public companies that made a bigger percentage of their campaign contributions in any given election during that period would have outperformed the S&P 500 by an average of more than 6 percentage points during the first year after an election."
Interestingly enough, the trend held true for the 2008 election as well. Marte continues: "A look at 10 publicly traded companies whose employees gave a higher percentage of their contributions to Barack Obama, including tech giants Microsoft (MSFT) and Google (GOOG) and media company Time Warner (TWX), outperformed the S&P 500 by an average of 17.6 percentage points in 2009."
Wow. So I bet you are all wondering which companies are on the list for this election? Well, as of the end of August, the aforementioned Microsoft, Google and Time Warner are still among the top donors for president Obama, and not too surprising, Romney's top donors are a who's who of Wall Street titans, including Goldman Sachs (GS), JPMorgan (JPM) and Bank of America (BAC).
In addition, I would add one sector each depending on who wins. If Obama gets another four years, investors should look at the healthcare sector as his Affordable Healthcare Act gets implemented.
A Romney win would be cause to investigate buying coal and other classic energy stocks. This sector has been under attack for the last three and a half years as Obama has favored alternative energy sources. But due to their lack of economic viability, I would expect Romney to encourage more traditional sources. I am certainly not saying that based on who wins you need to run out and buy these stocks, but it may be worth doing some research on these companies and then make a decision.
Effect on the economy
An Obama win will bring more of the same economically: continued lackluster economic growth, but growth nonetheless; worry over out-of-control debt levels (that will lead to another credit downgrade); and a very slowly improving jobs market as companies continue to hold back hiring due to the anticipation of more regulation and a higher corporate tax rate.
In a fascinating interview with John Ralston, Wynn Resorts CEO Steve Wynn explained why he didn't help bail out Israeli's Nochi Danker and Yitzhak Tshuva from their bad Las Vegas real-estate deal, saying: "I'm afraid of the president. I have no idea what goofy idea, what crazy, antibusiness program this administration will come up with. I have no idea. And I have to tell you, Jon, that every business guy I know in the country is frightened of Barack Obama and the way he thinks."
If Romney wins, I think you will see an incredibly fast pickup in hiring. Why am I so confident? Because high unemployment is not a structural problem. The dirty little secret is that corporations are making record profits and just sitting on loads and loads of cash. Businesses are afraid to hire because they don't know what new expense is coming down the road. A Romney victory will give a green light to begin hiring because his policies, everyone agrees, are more pro-business.