Investing

Why investors should pray for Obama

If the Democrats win, it will likely be better for Canadian investors.

CB_obama

(Photo: J. Scott Applewhite/AP)

On Nov. 6, millions of Americans will head to the polls. Canadians don’t have a say in which candidate, Barack Obama or Mitt Romney, will occupy the White House for the next four years, but the outcome will affect our investment portfolios nonetheless. Research suggests that markets are affected by who’s in office, at both the executive and legislative branches.

Sam Stovall, S&P Capital IQ’s chief investment strategist and a well-known financial historian, has found distinct patterns of stock-market behaviour in the presidential cycle. He looked at market data between 1900 and 2012 to see how politics affected the S&P 500 index. Bad news for investors, should the pattern hold: no matter who takes power, 2013 will be the worst year out of the next four.

On average, the markets have climbed just 4.1% in the first year of a four-year presidential cycle, with the first quarter seeing the worst return (–0.7%). Stovall adds that, since the turn of the 20th century, the market has been in positive territory just 57% of the time during a president’s first year. Fortunately, returns improve in years three and four as investors gain more confidence in an administration.

If Canadian investors could vote, they’d want to cast their ballots for Barack Obama. Ned Davis Research looked at the markets between 1948 and 2011 and found that when an incumbent Democrat wins, the market returns, on average, 16.8% in the post-election year. When the incumbent Democrat loses, the market falls 10.2%.

The best-case scenario, according to Stovall’s research, is if Obama wins the White House and his party controls both the Senate and the House of Representatives. In the 38 years that the Democrats controlled all three bodies, the market returned, on average, 8.4%. If Romney wins and Republicans take the Capitol, the average return over 29 years is 6.7%. What investors don’t want to see is a split Congress with Romney at the helm. When a Republican leads a divided Washington, the market returns an average 3.2%. Returns are better, up 7.5%, when a Democratic president oversees a split congress, but there’s only a 50% chance the S&P 500 will land in positive territory in that scenario.

The election outcome could also affect different sectors, says Stovall, though this has nothing to do with history. He thinks an Obama win will benefit seven industries: aluminum, alternative energy, gold, health care, home building, low-end retailers and telecoms. “He’s a big supporter of solar and wind power. Health care won’t become undone. He’ll try and stretch out foreclosures as long as possible, and if he increases taxes, people might gravitate to low-end retailers,” he says.

If Romney wins, Stovall expects to see gains in consumer staples, energy, financials, high-end retailers, railroads and utilities. “We’ll see a more rapid passing of the Keystone pipeline,” he says of energy, “and he’ll look to lighten up some of the regulatory things facing financials.”

If polls hinting at an Obama win and a divided Congress hold true, U.S. equity holders should brace themselves for a rocky 2013. “It won’t be a great year,” Stovall says. There remain external factors to worry about too. “We are still concerned about another global recession.”