It was a much asked question heading into the election. Which stocks should investors buy, and which should they avoid in case Obama wins the Presidential election? At first sight, it seems that one should avoid stocks as the S&P 500 (SPY) lost over 3.5% from the highs of Tuesday afternoon, just before the election, and the close on Friday.
Not Just Obama
While many commentators blame the sell-off to the election of Obama, there were more factors at work. There was a portion of bad news from Europe hitting the wires in the second half of the week. ECB President Draghi said that the latest data suggests that Germany is not isolated from the economic difficulties surrounding the country. Growth in the largest economy is expected to slow down from an expected 1.7% to 0.8% next year.
Furthermore the was the usual news flow from Greece which hopes to receive another EUR31.5 billion emergency loan, to be released on Monday. To make the debt position somewhat more sustainable, rumors hit the market late last week that creditors may cut interest rates on Greece loans and lengthen their maturities. The Greece Parliament is expected to pass a new budget on Sunday before the eurozone's finance ministers meet on Monday.
And finally, the most important aspect of the correction might be the shift of focus towards the fiscal cliff. The automatic tax increases and spending cuts are set to take effect on January 1. President Barack Obama and House Speaker John Boehner have to reach a deal as the cliff will push the US economy back into recession, according to the Congressional Budget Office. Boehner suggested that money could be raised by closing loopholes in the tax code, while he would oppose any income tax raise. Boehner is also in favor of entitlement cuts. Obama stressed he would veto any deal that will not expiry tax cuts for the rich, as he expects the rich to make a contribution to shore up the fiscal situation. The President would not be willing to raise taxes on middle-class Americans.
Enough About The News, Let's Turn To Stocks
So let's move away from the debate whether Obama is good for stocks in general, or not. How can you as an investor benefit from this outcome by investing in specific companies and industries?
One interesting group of outperforming shares are those of gun manufacturers. Shares of Smith & Wesson Holding (SWHC) rose some 13.6% over the past week, followed by Sturm, Ruger & Co (RGR), trading up 9.2%. Investors speculate and fear that Obama's re-election might lead to stricter gun laws, pushing up firearms sales in the near term.
The obvious beneficiaries from re-election are managed care companies expected to get million more clients in the coming years. Centene Corporation (CNC) which focuses on uninsured and underinsured individuals saw shares up 9.6% over the past trading week. Molina Healthcare (MOH), focused on low-income families saw shares trading up 8.6%.
A group of stocks which naturally underperforms on the election of a Democratic President are defense contractors. Shares of Northrop Grumman (NOC) lost 4.9% over the past trading week, while General Dynamics (GD) saw shares falling 6.3%. Lockheed Martin (LMT) limited the damage to 4.0%. Defense budgets will be expected to be tightened during the President's second term, and automatic spending cuts could hurt even more.
Wall Street Banks
Other obvious losers are the Wall Street banks which can expected tighter regulation amidst the implementation of the Volcker rule, the Dodd-Frank rules and the election of Elizabeth Warren into the senate. Goldman Sachs (GS) lost 5.7% on the week, while Citigroup (C) lost 4.4%. Morgan Stanley (MS) was hit the hardest, trading down 6.6%.
Large integrated energy names sold off as well. The re-election will result in continued tight environmental regulation and higher costs. The Environmental Protection Agency is already writing up tougher regulations regarding hydraulic fracking. Obama furthermore pledged to cut tax incentives to the energy sector. Large US integrated energy names such as Exxon Mobil (XOM) lost 3.4%. Pure shale gas plays which suffer from tighter EPA regulation such as Chesapeake Energy (CHK) lost 7.8% over the past week. Renewable solar companies such as First Solar (FSLR) rose almost 9% in anticipation of a continued stimulus for the renewable sector.
Do Your Own Homework
The effects on the individual stocks and industries were quite noticeable over the past week suggesting that investors did really think that the election between Barack Obama and Mitt Romney was a tight race. Before investing in any of these names you should obviously do your own homework and not solely rely on the election of a President to base your choice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.