In the next couple of months, the United States will either elect Barrack Obama or Mitt Romney as the President of the United States for the next four years.  Although markets tend to be highly efficient and market prices attempt to anticipate events in advance, the resolution of the uncertainty will ultimately lead to some stocks performing better than others.  For example, when President Bush beat Al Gore in 2000, many believed that defense stocks would have a boost.  Obviously, September 11, 2001 played a significant role in that, but even before September 11, Lockheed-Martin (LMT) went up by 18% from November 2000 to the end of August 2001, while the S&P 500 dropped by 14%.  Over the entire Bush term, LMT was up by 153%, while the S&P 500 was down 32%.  So getting the right stocks for right President matters.  Of course, it would be better to be able to predict which President will win, but even after the President is chosen, it might not be too late to get the right stocks.

So who’s going to win, Obama or Romney?  Currently, the betting sites have Obama winning the election (InTrade and IowaMarket).  Although, one should interpret these with some caution because often times the bettors on these sites aren’t very sophisticated.  For example, in 2000, these sites strongly held that George Bush would win the popular vote, but he didn’t.

There are then the polls which survey a sample of voters in order to get an idea of who will likely win.  Many national polls find Obama ahead (Politico).  But this lead diminishes if you look at “likely voters” and becomes within a statistical error term.  The Rasmussen poll has Romney in the lead (Rasmussen) but also within the margin of error.  The Gallup Poll has Obama in the lead (Gallup), but also within the margin of error.  Ray Fair, a Yale Economist, uses only a few economic variables to predict the Presidential elections.  He has been doing this for many years now and has been right most of the time.  His latest results have Obama with a slight lead, but too close to call (RayFair).  The majority of polls favor Obama, but are too close to call (AllPolls).  This is much different than what we saw in 2008, when Obama had significant leads over McCain.  So we’re back where we started.

What stocks should you own in a post Obama victory or a post Romney victory?  Let’s start with the first big issue:  dividend taxes.  Romney wants to extend the Bush tax cuts.  This means that dividend taxes will remain at 15% versus the 39.6%.  In addition to this, the Obamacare would make higher income individuals pay an extra 3.8% in taxes on dividends and other passive income (ObamaCareTaxes).  Thus, the tax rate on dividends would jump from 15% to 43.4%.  On the margin, this would make dividend paying stocks less attractive and investors would probably begin dumping high dividend stocks prior to and after an Obama victory.  So what’s the strategy?  If Obama wins, consider selling high dividend paying stocks (PM, MO, LO, FTR, WIN, UGI) and portfolios of stocks (VIG, DVY) and if Romney wins, consider buying them.

What about healthcare companies?  There are arguments pro and con to holding healthcare.  With Obama, health care companies will have higher costs, but they will also have more customers.  Various analysts have disagreed on whether health care will be better or worse under Obama, thus, I would eliminate this from consideration (for more analysis on healthcare, see Stovall’s report on September 4, 2012).

A Romney win will probably help oil companies (ATLS, TRP) and oil-related ETFs (XOP,IEO).  Big banks will probably do the same under both, but more small banks and mid-size banks might do better under Romney, since excessive regulation will be curtailed (XLF, KBE, KRE, and IAT).  Defense stocks will probably do better under Romney as well (LMT, RTN, ITA, PPA).  Steel (X) and Coal (KOL) companies may also do well.  A Romney win might also help private equity companies due to the carried interest debate.  Two companies that are publicly traded private equity firms are KKR and BX.

An Obama win will probably help relatively more home related stocks (PHM, TOL,XHB,ITB), renewable energy companies (FSLR,SPWR), and gold (GLD,IAU).  Ironically, gold might go up, because there will be a lack in conviction in Obama’s ability to turnaround the economy and the fear of further stimulus.

I would also like to tell you about which President will make the stock market go higher, but that might be biased by a political view so I will leave that up to you.  Whomever you vote for and whatever investment you make, think about taking a small position based upon who actually wins the presidency.

Enjoy!

Ludwig

September 19, 2012