Elections And Sector Performances Of Stock Indexes

by: Evariste Lefeuvre

Even though Republicans like to present themselves as more pro-business than their opponents, the indices have historically exhibited better performance under Democratic presidents. If you look at the performances of the last two American presidents, history has repeated itself: the S&P 500 fell 31.6% under Bush's two terms, and under Obama, the index rose 59.1%. To see if stock performance reflects the socio-economic "philosophy" of presidents we must consider the relative performance of industries.

Under Bush, energy, materials and consumer goods (tobaccos, food…) performed better (60%, 6% and 4%, respectively, while the S&P 500 lost 32%). Mining (235%), oil and gas producers (83%), have significantly outperformed, followed by tobacco (77%), construction and materials (69%). Other top performers were industrial transportation (31%), household goods and the aerospace and defense (13%).

We may consider that these developments in the sub-indices reflect the inclinations of the presidential team and its relationship/patronage with the energy sector. The performance of construction could also reflect the willingness of Bush to make America an "ownership society." Debt-driven consumption (in the context of a jobless recovery) and the wars could easily explain the relative performance of the other sectors.

Undoubtedly, there is a link between the performance in the construction sector, the sharp rise in residential investment (peaking at 6.5% of U.S. GDP in mid-2006), and the policies that led to the subprime mortgage crisis, but the outperformance of the energy sector reflects, above all, the commodity boom and soaring oil prices recorded between 2002 and 2008.

Moreover, for any investor, the outperformance of staples against discretionary may seem surprising in a decade when overall volatility was low and consumption (thanks to debt) was up sharply. The chart below explains the apparent anomaly: the Bush presidency is bound by two major crises that strongly biased the calculations of relative performance between cyclical and consumer discretionary.

With Obama, consumer discretionary (cars, durable goods) showed the best performance (119%), followed by new technologies (113%) and materials (69%), while the S&P recorded an increase of 59%. Other top performers were forestry and paper (218%), media (129%), mobile phones (127.5%), cars (126%), technology (124%), and chemicals (116%).

It is easy to consider these performances as a reflection of companies supported by Obama (technology, media), but the link is difficult to establish. In addition, how do we explain the performance of the automotive sector?

It may be partly explained by bankruptcy management policy. First, rescuing and downsizing manufacturers in 2008, and then stiffening regulation, accelerating the renewal of a fleet, which was more than 11 years old, on average, at the end of 2007. If American society is less mobile (fewer miles traveled), the energy efficiency of miles traveled increases sharply, as can be seen in the chart below.

The good performance of chemicals is explained by the beneficial impact of the massive extraction and low price of natural gas liquids (ethane) on the sector. This is something the Obama White House inherited, and is not the result of a federally driven policy.

Presidents' influence over the relative performance of stock sectors is much more significant than the effect they have on the labor market. Guidance policy, regulation, and military impact are often decisive. However, after two debates, it remains difficult to make any assumptions about which sector to overweight in the case of a Romney or Obama victory. One may suggest that the Romney presidency will be more favorable for transportation and technology, and Obama would be better for health (managed care) and alternative energy, but the reasoning behind this is not entirely clear.

Statistically, the best strategy is probably to bet on tobacco whose performance under Bush (76%) and Obama (113%) has been astonishing. Even though cigarette consumption has been declining in the U.S. since 1973.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.