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There is no question that financial analysts are anxiously awaiting the result of the U.S. presidential election and its effect on the stock market. It is somewhat questionable whether the ultimate direction of the market will be influenced by the results of the election itself, or by upcoming critical events such as the fiscal cliff, European financial woes and Federal Reserve policy. As in past elections, stock market performance may vary by sector; for example, some may expect defense stocks to perform well under a Republican president, while others may expect technology stocks to do better under a Democrat president.

During the past 40 years, in the 6 months following the presidential election, the technology-heavy NASDAQ index appreciated on 3 out of 4 occasions in 1976, 1992 and 1996 (75% of the times) when the election was won by a Democrat. Average appreciation was +5.73%, while it dropped by -8.89% in 2008 following Obama's election. Meanwhile, when the election was won by a Republican, the NASDAQ appreciated on 3 out of 6 occasions (50% of the times) by an average of 9.21%, while it remained unchanged in 2004 and depreciated by an average of -32.25% in 1972 and 2000, driven by a drop of -49.64% in 2000 following the bursting of the internet bubble.

Year Elected President

NASDAQ 6-months performance after election

2008 B. Obama Democrat -8.89%
2004 G.W.Bush Republican unch
2000 G.W. Bush Republican -49.64%
1996 Bill Clinton Democrat +0.62%
1992 Bill Clinton Democrat +10.8%
1988 G.H.W. Bush Republican +8.42%
1984 R. Reagan Republican +10.74%
1980 R. Reagan Republican +8.48%
1976 J. Carter Democrat +5.77%
1972 R. Nixon Republican -14.87%

Given such data, and the fact that Obama is expected to win the presidential election, there is a good likelihood that in general technology shares may do well during the next six months. As for the NASDAQ underperformance during the six months following his initial election in 2008, we are willing to consider it as a possible aberration due to the financial crisis and the economic mess he inherited. Unemployment has recently improved to below 8%, while the Federal Reserve is maintaining an accommodative policy with unprecedented quantitative easing in place in order to bring unemployment further down. Such combination is likely to give further support to the economy and technology sector.

When examining specific technology issues, it is more difficult to draw any definitive statistical conclusions. Many of today's leading technology companies, such as Apple, Inc. (AAPL), Google (GOOG), Microsoft (MSFT) and Intel (INTC) are relatively new companies that have been around for six elections or less. Only International Business Machines (IBM) has been around during the past 10 elections.

Apple, Inc.


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Apple stock performance over its lifetime. Source: Yahoo Finance

During the past 5 presidential elections, Apple shares appreciated on 3 occasions in 2008, 2004 and 1996 by an average of 29.97%, driven by stellar performance 2004 (+52.85%), while they dropped on two occasions by an average of -3.30%.

Year Elected President

Apple Inc. 6-months performance after election

2008 B. Obama Democrat +4.5%
2004 G.W.Bush Republican +52.85%
2000 G.W. Bush Republican -3.39%
1996 Bill Clinton Democrat +32.57%
1992 Bill Clinton Democrat -3.22%

During the next six months, Apple shares will be heavily impacted by earnings performance for the quarter ending December 2012, driven by revenues from iPhone 5. In addition, Apple's margins will come under scrutiny, while analysts will look for any possible cannibalization effect from the newly released iPad mini. Current analysts' earnings estimates are calling for a consensus of $13.30/share for this quarter, while we are actually looking for stronger earnings.

With analysts' earnings expectation of $50.26/share for the calendar year ending 2012, and $58.70/share for the calendar year ending 2013, Apple boasts respective P/E ratios of 11.48 and 9.83 as of the close of 11/2/12. Regardless of the results of the upcoming elections, we believe Apple will most likely trade higher due to its attractive valuation as illustrated by its low P/E ratios and strong cash position of over $121 billion as outlined in our article of October 8, 2012, "9 reasons Apple shares will make new highs, again". An examination of the above historical data for Apple also shows that there had been no correlation as such between its performance and the political affiliation of the successful president.

Google, Inc.


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Google stock performance over its lifetime. Source: Yahoo Finance

Google has only witnessed two presidential elections, increasing by 0.77% six months following the 2008 election, and dropping by 7.61% six months following the 2004 election.

Year Elected President

Google 6-months performance after election

2008 B. Obama Democrat +0.77%%
2004 G.W.Bush Republican -7.61%

During the next six months, Google shares will be impacted by the success of its market penetration for its android operating system, as well as its advertising revenues. Following a substantial miss on its latest earnings, whereby Google reported $9.03/share versus analysts' expectations of $10.65/share, we expect Google shares to continue to be under pressure, until it overcomes declining advertising revenues resulting from consumers' migration from desktop/laptop to mobile smartphones.

With analysts' earnings expectation of $39.82/share for the calendar year ending 2012, and $46.39/share for the calendar year ending 2013, Google boasts respective P/E ratios of 17.27 and 14.83 as of the close of 11/2/12. Regardless of the result of the upcoming election, given its somewhat elevated forward P/E ratio, its disappointing recent advertising revenues, increasing competition from Facebook (FB) and potentially Apple's Siri (see our article of October 17, 2012 "Google's search lead can become Apple's advantage in 5 years"), Google's shares are likely to remain on the defensive.

Microsoft


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Microsoft stock performance over its lifetime. Source: Yahoo Finance

Six months following the six elections that Microsoft has witnessed in the past, its shares have appreciated on 3 occasions in its earlier history in 1988, 1992 and 1996 by an average of 12.8%, while they have depreciated in its recent years of 2000, 2004, and 2008 by an average of -14.67%. Microsoft seems to have fared better when the office for the presidency was won by a Democrat (rising on 2 out of 3 occasions, while under a Republican presidency, it fell on 2 out of 3 occasions), although the data sample may be considered too small.

Year Elected President

Microsoft 6-months performance after election

2008 B. Obama Democrat -19.23%
2004 G.W.Bush Republican -4.49%
2000 G.W. Bush Republican -20.29%
1996 Bill Clinton Democrat +33.14%
1992 Bill Clinton Democrat +1.42%
1988 G.H.W. Bush Republican +3.85%

During the next six months, Microsoft shares will be primarily impacted by the success of its latest Windows 8 operating system, as well as the penetration of mobile devices using Microsoft's mobile operating system . With Microsoft users long overdue for a potential upgrade, we believe there is a good likelihood for Microsoft shares to perform well.

With analysts' earnings expectation of $2.89/share for the calendar year ending 2012, and $3.24/share for the calendar year ending 2013, Microsoft boasts respective P/E ratios of 10.21 and 9.10 as of the close of 11/2/12. Given its somewhat encouraging performance during past elections (although past performance is no indication of future performance), in addition to its attractive valuation (with moderate P/E ratios) going into its new product cycle, Microsoft could indeed rally during the next six months following the elections.

Intel


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Intel stock performance over its lifetime. Source: Yahoo Finance

Intel shares in general have done well six months following presidential elections, rising on 4 occasions by an average 24.08%, and dropping on 2 occasions by an average of about -24.52%, driven by the substantial drop of almost -49% in 2000. Intel's appreciation six months following a Democrat win is substantially more than following Republican win, rising an average of 43.45% as opposed to 4.72%. Meanwhile, it depreciation of -48.98% due to the bursting of the internet bubble in 2000 (R) is also substantially more than its depreciation in 2008 (D).

Year Elected President

Intel 6-months performance after election

2008 B. Obama Democrat -0.07%
2004 G.W.Bush Republican +2.88%
2000 G.W. Bush Republican -48.98%
1996 Bill Clinton Democrat +27.24%
1992 Bill Clinton Democrat +59.64%
1988 G.H.W. Bush Republican +6.56%

During the next six months, Intel's fate is also linked to the success of Windows 8 devices by computer and cell phone manufacturers. With analysts' earnings expectation of $2.11/share for the calendar year ending 2012, and $1.97/share for the calendar year ending 2013, Intel boasts respective P/E ratios of 11.08 and 10.35 as of the close of 11/2/12.

Given Intel's moderate forward P/E ratio, in an environment of accommodative Fed policy, as well as Intel's past tendency to do well six months following presidential elections, we believe there is a good likelihood Intel shares will rally during the next six months. Its major loss due to the bursting of the internet bubble in 2000 in highly unlikely to repeat itself, while the current non-inflated price for Intel may provide a good entry point.

International Business Machines

IBM stock performance over its lifetime. Source: Yahoo Finance

IBM has been around longer than any other technology stock we have examined in this article. During the past 10 presidential elections it has witnessed, IBM has appreciated on 5 occasions six months following the election by an average of 5.97%, while it has depreciated also on 5 occasions by an average of -8.62% . Meanwhile, it has appreciated on 2 out of 4 occasions following a Democrat win, while it has appreciated on 3 out of 6 occasions following a Republican win.

Year Elected President

IBM 6-months performance after election

2008 B. Obama Democrat +10.66%
2004 G.W.Bush Republican +0.35%
2000 G.W. Bush Republican -4.03%
1996 Bill Clinton Democrat -0.26%
1992 Bill Clinton Democrat -21.70%
1988 G.H.W. Bush Republican -7.53%
1984 R. Reagan Republican +0.39%
1980 R. Reagan Republican -9.59%
1976 J. Carter Democrat +5.64%
1972 R. Nixon Republican +12.8%

During the next six months, IBM's fate will be linked to the ultimate outcome for the U.S economy, as well as the global economies due to IBM's international exposure. With analysts' earnings expectation of $15.13/share for the calendar year ending 2012, and $16.64/share for the calendar year ending 2013, IBM boasts respective P/E ratios of 12.78 and 11.62 as of the close of 11/2/12.

In its earnings release for the last quarter, IBM missed analysts' estimates for $25.7 billion in revenues, reporting actual revenues of $24.7 billion. As such miss was blamed on lower than expected revenues in the month of September, IBM's performance during the next six months may hinge on whether such drop was a one time event, or possibly the start of a negative trend. As from a cyclical perspective IBM shares have not shown a clear direction following presidential elections, as well as current uncertainty about direction of future revenues, IBM shares may not rally during the next six months, despite an attractive valuation from a forward P/E ratio perspective.

Conclusion

In general, following the presidential elections, there seems to be a higher likelihood for technology shares to rally in case of a Democrat win. However, when examining 5 leading technology shares, regardless of who the winner is, there is a good likelihood for Apple, Microsoft and Intel to rally within six months following elections. As for IBM, its valuation is attractive although more certainty is required for its future revenue forecast. In the case of Google, despite lack of historical data, it does seem the odds are stacked against a rally in its shares. Intermediate term investors who share our view may wish to buy Microsoft, Intel and Apple at current prices.

Source: Will These 5 Tech Stocks Boom After The 2012 Elections?