Today the Dow Jones jumped exactly one percent, and already pundits and market talking heads are talking about how the economy is going to impact the market, and if it already has. Writers are already busy pushing pieces on Seeking Alpha about the best stocks to buy in an Obama or Romney win, essentially offering partisans the chance to put their money where their ideological mouth is, metaphorically speaking. While this kind of retail advice will wallpaper the popular outlets and definitely has it’s place in the markets, you might find institutional investors and professional portfolio managers spending very little time talking about the election. In fact, spend enough time with many professional investors, and you might even forget that there’s an election going on at all.
That’s because there are more important things in the world than who is going to be the next United States president. At least from an investor’s point-of-view, where larger macroeconomic trends relating to consumer spending, especially in the U.S., Europe, and China, far outshadow the immediate political ramifications of the election.
Instead of discussing how an Obama or Romney win will impact the markets, investors first need to consider why and how an Obama or Romney win would impact the nation, and how that in turn would impact the market. Most experts seem to think it’s a non sequitur, while much more important economic indicators are moving the needle across equity markets.Here are three perspectives that most professional investors will be taking during this election.
A Market Efficiency View
Technical analysts and the so-called “Bogleheads” who broadly believe that most if not all relevant information is already built into stock prices will say that, whether the election will have a direct impact on the economy or not, the information is already widespread and there is no way to outsmart the market.
Perhaps the most respected and widely cited site for projecting the election is the FiveThirtyEight blog on the New York Times site, which is projecting a likely Obama win. According to Nate Silver, who runs the site for the Times, Obama has a 90.9% chance of a win, and Silver is predicting a landslide in electoral votes (313 for Obama vs. 225 for Romney).
With these numbers, it’s difficult to say that an individual investor can outsmart the market when it comes to who will become president and how this will impact the economy.
An Apolitical View
While most market participants probably sway to one side of the aisle or the other, several will be more apolitical in their economic viewpoint, focused instead on those economic policies that foster growth and an appreciation of their individual holdings. For those who have shorted the market, that could even mean a downfall in the market overall.
Apolitical market participants will likely instead point to other economic factors that caused the Dow Jones to climb by exactly 1% on election day. While Bloomberg leads with a headline like this, market commentators would instead point to strong numbers from Hewlett-Packard (HPQ) and United Technologies (UTX), as well as robust strength in the technology sector that many would suggest was far oversold amidst fears that Google (GOOG) and Apple (AAPL) would see thinning margins. This caused the Technology SPDR (XLK) to lose nearly 10% of its value within a month. But that overreaction is now causing market sentiment to reverse losses, causing a rise. After all, investors are realizing, technology remains the fastest-growing sector in the world, and the growth potential of virtual technologies (mobile apps, enterprise software, online advertising, etc.) is near infinite.
Of course, none of this has to do with Romney or Obama, and a lot of market participants know that, so they are instead looking at changes in unemployment (bad), housing prices (good), market volatility (good, sort of), and activity (bad–very, very bad). This will help build a more profitable model than playing politics.
A Contrarian View
There is finally the contrarian view which, unlike the market efficient analysts, will instead look for places where the market has fabulously miscalculated the future, which can become a tremendous profit potential for the savvy investor.
How can you be contrarian about the election? There are two ways: you can bet on a Romney victory despite signs that this is unlikely, and invest in those companies, sectors, and funds that you believe would benefit from a Republican presidency. To do this, you would first have to identify those investment opportunities and stay confident to your belief that a surprise Republican victory is in the cards.
Another contrarian and perhaps more cynical view would be that fundamental problems in the economy and protracted political deadlock will worsen the American economy. This would largely be a bet that America will fall off the fiscal cliff, causing drastic and dramatic cuts that were specifically designed to be painful, expensive, and economically disastrous–as well as ruinous to several sectors like the defense contracting sector. A long-short strategy would involve buying gold–possibly with an investment in the SPDR Gold Trust (GLD) and shorting the large contractors such as Raytheon, Boeing, Lcokheed Martin, and Northrop Grumman (RTN, BA, LMT, NOC). Note that all of these companies are up on Tuesday despite being contractors dependent on U.S. defense spending, which has been targeted for cuts both by the upcoming fiscal cliff and the incumbent president and likely winner in today’s election.
Conclusion
There are various strategies to consider when you are managing a portfolio, but at the end of the day the emotional considerations of who you want to win, what kind of political policy you believe in, and which economic philosophy you think is more effective (whether Libertarian, Socialist, Keynesian, or other) are irrelevant. What is much more important for any investor is how macroeconomic trends, sector movements, and individual corporate decisions will impact their holdings. And regardless of jabs about Obama ignoring his 401(k) or Romney’s much bigger personal fortune, at the end of the day equities will rise in an economy where there is more demand, innovation, and appetite for investment. Not all of that depends on who sits in the White House, and most investors know that.