It doesn't matter who wins the Presidential election, the S&P 500 (SPY) will go higher. Sound crazy? Here's my rationale: regardless of who's in office for the next 4 years, business leaders will finally have a sense of certainty regarding the framework for fiscal and monetary policy. Simply knowing the ground rules will allow business leaders to make informed decisions about hiring, capital expenditures, and expansion. Hence, the current paralysis griping business leaders and hampering economic growth will be lifted, ushering in a wave of robust economic growth.
Here's the key point, we don't need the best solution to our fiscal and monetary woes, we just need a solution. Right now our government is rudderless, which creates uncertainty for executives and consumers. The human mind hates uncertainty, and our natural tendency is to hunker down in this environment. Accordingly, we get economic paralysis. But fortunately, humans are amazingly good at adapting to new environments once we are able to assess the situation. This will allow business leaders to quickly gain confidence and start making decisions again once this political circus leaves town.
Any Plan is Better Than No Plan:
The winner of this election will have a mandate to carry out his policies, thereby creating certainty to business leaders as to what they can expect in terms of taxes, regulations, government spending, and foreign policy. It doesn't matter who has the better plan, it just matters that we'll have a President that is empowered to enact a plan. The economic ship will regain its rudder, excess cash that sitting on corporate balance sheets will be put to productive use, and the economy will gain momentum.
The last year has been a stinker. We wake up every day to the terrible news cycle: the U.S. economy is stalled, out national debt will condemn our kids to economic hell, the European crisis will result in another financial panic, negative political ads that would turn even the most optimistic person into a cynic, and a crashing Chinese economy.
But the market is telling another story. The S&P 500 is up 15% YTD, implying that investors are anticipating that things getting better over the next 12 months. This is not crazy, and, in fact, is very much in line with my thesis.
Certainty Creates the Foundation for Decision-Making:
It's important to understand just how much humans dislike uncertainty. We get nervous. We get tense. Think about your first day at a new job and the uneasy feeling that develops from not knowing what to expect. Simply put, you are out of your comfort zone. High-level executives are no different, and importantly, are used to operating with lots of information. So when they lack information in an environment like today, its natural to take a "wait and see" approach.
Avery & Zemski write about this topic, noting that there are three dimensions of uncertainty: value, event, and composition. They claim that when two or more of these conditions exist, herding mentality develops. Today, we have business leaders herding together in a state of inaction.
Once Romney or Obama win, we'll have a new framework for fiscal and monetary policy that will be in place for at least 4 years. This will enable business leaders to make decisions. Again, it's important to note that it doesn't have to be the most efficient solution to our problems, just the simple reality that everyone knows the ground rules.
Both Men Are Qualified:
Unless you are blinded by rage or ultra-partisanship, you should agree that both Barack Obama and Mitt Romney are intelligent and thoughtful. This will prevent either one leading America off the cliff -- whatever cliff you want to entertain. Despite the TV telling me otherwise, I think we'll be in good hands regardless of who wins.
Lets Make A Deal:
The importance of the new President having a mandate cannot be overstated. Because the election is being pitted as one vision for America vs. a different vision for America, Congress must respect the wishes of the voters and put their hatred aside in order achieve compromise on the defined mandate.
In this scenario, the Republicans and Democrats will be forced to avoid the fiscal cliff and find a long-term solution to the deficit and healthcare. Again, these may not be the optimal solutions, but it's a substantial step in the right direction.
How I'm Playing This Thesis:
Based on this optimistic assessment of the political landscape, I am positioned for a broad rally. First, I think that many industrial names have been hurt by excess caution among business leaders around the globe, so I am long Caterpillar (CAT) and Cummins Engines (CMI). This is also a bet on the European economy bottoming and the Chinese government stimulating after the transition of power.
I am also long some juicy dividend names such as Consolidated Edison (ED), Southern Company (SO), CenturyLink (CTL), and Windstream (WIN). My belief is that Romney wouldn't allow dividend tax rates to rise and that Obama would eventually come to his senses an realize that his plan to raise rates on dividends does no one any good. If he doesn't I think the downside is limited because most of these stocks are owned in tax-deferred accounts and the stocks have already sold off meaningfully.
I am also very bullish domestic oil companies because both candidates will promote increased production post election. Romney has been very clear about this, and I strongly believe that Obama is just waiting until after the election to green light the Keystone pipeline and turn more dovish on U.S. oil and natural gas. Hence, I own Occidental Petroluem (OXY) and EOG Resources (EOG). I have Range Resources (RRC) on my radar screen, but I am waiting for a better valuation after a huge run in the stock and natural gas prices.
Risks to my Thesis:
Of course, I may be wearing rose-colored glasses and I may be wildly wrong. In my mind, the biggest risk is that Barack Obama wins, Republicans remain outraged and refuse to compromise. Such a scenario brings the fiscal cliff into play.
I am also worried about social unrest in China as the micro blogging services are making it harder for the government to suppress dissent. While the government has plenty of firepower to stimulate the economy, its vulnerable to social unrest if people start demanding more serious reforms. This would risk the economic miracle that is China and cause a meaningful slowdown in global growth.
But overall, I am holding out hope that our elected leaders will eventually get it right and America will regain its footing over the next 12 months.