Whether the outcome of the presidential election is four more years for Democrat Barack Obama or a new administration led by Republican Mitt Romney, several area financial analysts predict the lifting of pre-election uncertainty will result in a stock market rally.
“It’s more the resolution of the election than who wins specifically, particularly on a short-term basis,” said William Delwiche, investment strategist at Milwaukee-based Robert W. Baird & Co., Inc.
According to Delwiche, historically the uncertainty ahead of an election causes stocks to work sideways or lower. Once that uncertainty has been removed, stocks typically enjoy a year in rally.
Ken Evason, chief executive officer and chief investment officer at Milwaukee-based Windermere Wealth Advisors LLC, said the market sees through leaders themselves to the policies that are adopted by Congress along with the president. There is no direct causal connection between the political preferences of the presidential leaders and the stock market, he said and described the stock market as “apolitical.”
“It really doesn’t matter who the president of the United States is in that the president has to work with the other branches of government including both the Senate and the (House), and so either presidential candidate will be accepted by the stock market given that the choice has been made, clearing up uncertainty as to the political process,” Evason said.
While Jack Ablin, chief investment officer at BMO Harris, is confident the stock market “could get a little bounce” with a win from either candidate, he said a victory by Romney will likely spark a longer rally since history has typically shown markets experiencing a bigger boost when a new political party takes over.
“I would say (with) an Obama victory, we could get a rally for maybe a few days,” Ablin said. “(With) a Romney victory I could see a stock market tailwind for two months.”
Should President Obama secure reelection, several analysts said they believe the health care industry will benefit as his administration’s victory would provide more certainty with the outcome of Obamacare.
But Ablin disagrees. He has been tracking correlations of sectors as a function of Obama’s reelection chances. His findings show that one of the biggest negative correlations to Obama’s reelection chances is health care. Ablin doesn’t believe this negative correlation should come as much of a surprise.
“It’s an inverse relationship with Obama’s prospects that reflects investor concern regarding the rolling out of Obamacare mandates,” Ablin said in the most recent issue of his Current Market Update.
His empirical findings also reflect a significant negative correlation between Obama’s chances of a second term and financials.
“Generally speaking, financial companies tend to underperform the market whenever public sentiment shifts in the president’s favor, indicating that investors anticipate a wider net of red tape will be cast over the group under a second Obama Administration,” he said in the update.
The sectors most positively correlated to Obama’s reelection, according to Ablin’s study, are technology and telecom. Ablin said that in the realm of technology, there is less regulatory oversight, and so while tax rates may change he doesn’t believe government regulations will necessarily impede technology companies.
Energy stocks could also be affected by the election’s outcome.
Ablin found a positive correlation between energy and Obama’s reelection as well.
“Energy is more volatile than the broad market, so when Obama’s chances tick up in tandem with rising stocks, energy investors start smiling,” he said in the update.
Delwiche believes clean energy companies would likely thrive under an Obama win.
“I think his administration historically has more favorably been disposed to clean energy rather than conventional energy, so that bias would probably remain there,” Delwiche said.
Domestically-produced natural gas, coal and oil would fare better under a Romney victory, Delwiche said.
Romney has strongly advocated self-sufficiency in energy and the development of a sound, long-term domestic energy policy, which would only further benefit the energy sector, Evason said.
Michael Sadoff, an investment advisor at Glendale-based Sadoff Investment Management LLC, said a win by Romney also could boost high dividend stocks since Romney advocates against increasing taxes dramatically.
Should Romney come out on top, Sadoff believes the market will react more strongly than it would under an Obama win. Sadoff said the market appears to be pricing in a win by Obama, pointing to the prediction market website www.intrade.com, which recently placed Obama at a nearly 62 percent chance of reelection.
Romney’s seemingly weaker prospects of election coupled with his drive for job creation could potentially lead to a more significant response from the market, Sadoff said.
“If Romney gets elected, he’s proposed doing some drastic changes and that potentially could change the direction of the economy,” Sadoff said, highlighting Romney’s pro-job stance along with his proposition to cut income tax rates and offset them with deductions.
No matter who takes hold of the presidency, Evason believes defense spending will need to be brought under tighter control.
And no matter the winner, the fiscal cliff will be a driving force in the coming year. The fiscal cliff refers to several federal tax increases and spending cuts that are scheduled to go into effect in 2013, unless Congress and the White House agree to take action.
“There’s going to be a massive change regardless of who the president is because of the fiscal cliff,” said Andrew Busch, global currency and public policy strategist at BMO Capital Markets. “If it’s not handled properly, the markets will hate it.”
Should politicians move the fiscal cliff six months forward, Busch believes the markets will likely take a small setback, but nothing too severe.
Ablin says that, based on his research regarding the fiscal cliff, if the cliff were to trigger the spending cuts and tax increases on Jan. 1 as planned, it would take roughly 5 percent out of the economy, which would push the country into a moderate to severe recession.
Ablin believes it’s unlikely that policymakers will let that happen.
“I don’t think either side – Republican or Democrat – want to be accused of pushing the economy into recession, and I think my view is probably the consensus view,” Ablin said. “Both sides will come together and agree to at least postpone it until the first quarter and let the newly elected Congress people address it at the beginning of the year.”
Evason is just as optimistic. He describes the fiscal cliff as a practical problem that has to be solved by congressional members.
“I don’t believe that rational people in democratic office would do something as silly as to let this fiscal cliff happen,” he said. “It’s too important to our citizenry. We expect them to bring forward good government for the people.”
Other analysts, like Delwiche, aren’t so sure.
“The outcome I think depends on the election,” Delwiche said. “It’s really hard to forecast it right now. Either way, I think it will be incredibly difficult to come up with some sort of solution.”
But with the environment in Washington, D.C., “poisoned by the election,” Delwiche doubts elected officials will come together in a bipartisan manner to solve the fiscal cliff, and that would negatively affect the stock market.
Meanwhile, Sadoff’s firm is “cautiously optimistic” heading into 2013.
“There’s a number of mixed signals, so part of it’s going to depend on how the economy performs, and part of it will depend on this fiscal cliff,” Sadoff said. “It wouldn’t take a lot to push us into recession, and so that’s something we’re certainly keeping an eye on.”
