If Obama Wins, Buy IT, Telecom, Sell Materials, Healthcare; If Romey: Buy Staples, Healthcare, Fins, Sell Materials
While the much anticipated ramp into the elections has so far failed to materialize (confirming yet another "technical pattern" of the New Normal, namely that whatever most expect to happen, never happens), it is time to consider what impact a given administration - either Republican or Democrat - would have on the stock market. Fiscal cliff aside, whose overcoming will be very problematic in either case and will likely necessitate a market plunge a la August 2011 to be fully implemented, although more likely if Romney wins the presidency or there is a Democratic sweep, both outcomes which according to popular conventional wisdom and various online polling services have a less than 50% chance of occurring, it turns out that at the macro level there is absolutely no difference for the market whether the president is a republican or a democrat for stock returns one year after the election. As Goldman observes: "Since 1976, the S&P 500 has offered approximately 10% total returns in the twelve months following a presidential election, regardless of which party wins that election. Performance is also very similar over shorter three and six month windows. However, median returns are slightly better early in Republican administrations, while during an entire four year term the equity market has somewhat higher returns under Democrats." In other words, those who are unsure if to invest in the broad market based on who wins, should not have the party affiliation of the winner as a consideration, at least not as a key issue. Where there are, however, nuances is at the sector level, which is where those seeing to generate "presidential beta" should consider trading on.
Alternatively, those following alternative measures of election forecasting can look at the relative performance of these sectors over the next 2 weeks to see which way the market is voting, and how much it differs from the "forecasts" of political hacks, all of which are partisan and seek to derive reflexive behavioral outcome whereby the gullible voters are driven by what they "see" are certain outcomes, or from InTrade's largely meaningless, flash smashing and manipulated predictions (just recall what InTrade said on Obamacare...).
Here is how Goldman's David Kostin explains it:
At the sector level, politics - and possibly policies - matter more. Over the past 35 years, Democratic terms are associated with the outperformance of cyclical stocks while more defensive and higher yielding sectors have outperformed during Republican presidencies. One year after a Republican president is elected, Consumer Staples, Health Care and Financials have generally outperformed the S&P 500 while Materials and Tech have lagged. Following Democratic victories, Information Technology and Telecom stocks have led the market while Materials and Health Care have fallen off the pace.
The past four years have largely followed suit with Consumer Discretionary and Information Technology shares outperforming the market since Election Day 2008. Meanwhile, Financials, Energy, and Utilities stocks have lagged the market, with all three impacted by regulatory issues to varying degrees. In contrast, Health Care has outperformed the S&P 500 by about 700 bp.
In other words, create an Index with a pair trade of long Consumer Staples, Health Care and Financials and short Materials and Tech vs another Index long IT and Telecom and short Materials and Health Care, and starting today keep track of how they perform over the next 10 or so days to gauge what the real vote is: that of the market.
Visually, here is why the general market is broadly agnostic to who wins:
How various indices perform under either administration: