One week from today, America will elect its next president.
What was a hotly contested race a few weeks ago now appears to be swinging in favor of Democratic candidate Barack Obama, but that doesn’t necessarily mean election night will be much less dramatic.
The question is: How will this major event and changing of the White House guard affect the economy, the stock market – and, more importantly, individual investors? Many investors are already sick to death of the drama that the stock market has tossed at them this year, so aren’t likely to welcome much more.
Let’s take a look…
The four-year presidential cycle and its impact on the stock market
Despite the current rhetoric and hype surrounding the candidates’ respective policies, measures enacted typically don’t make any serious dent on the economy for a year or two after they’re passed into law.
Yale Hirsch, one of the co-authors behind the respected Stock Trader’s Almanac has studied the effect that presidential election cycles have on the stock market. And his research indicates that the market generally follows a pattern, regardless of whether a Republican or Democrat administration wins the White House.
According to the theory, here are the stock market returns between 1948 and 2007…
• The first post-election year is typically the worst performer in the presidential cycle, with the S&P 500 posting a 7.3% return.
• The second year sees the highest record of bear-market bottoms, with the S&P recording a 10.1% advance.
• In the third year of the presidency, the market picks up dramatically, notching up a 22.9% gain.
• The final year of a presidency sees more uncertainty creep into the market, with a 12.1% gain. That’s still above average, though.
While the past four years haven’t followed the above trend, this is an entirely different time, with the US experiencing an epic financial crisis right on top of the presidential election.
And the market could easily fall back into this pattern… because right on schedule, economists foresee recession conditions over the next two years.
The post-election healthcare environment
As an investor, if you’re looking for a map of how the next cycle will play out – and who could be affected the most – a lot depends on whether the winning candidate can live up to his promises. But that can depend largely on who controls Congress and the importance of the sector.
For example, areas such as healthcare, energy, education, and defence are always going to be pretty heavily funded, no matter who is running the show.
With regard to healthcare, this election is once again filled with candidates’ promises of how they’re going to create affordable healthcare for all Americans – a task that always seems to be easier said than done.
According to the International Strategy and Investment (ISI) research firm, a McCain administration would probably represent good news for firms such as Pfizer (NYSE:PFE), Genzyme Corp (Nasdaq:GENZ) and Genentech (NYSE:DNA), since they’d be less likely to face restrictions on drug prices.
In addition, McCain may not opt for as much of an overhaul of healthcare as Obama, so managed care firms could see an advantage. Obama would seek changes to Medicare and crack down on medical malpractice areas, so look for managed care and insurance companies respectively to undergo Obama’s favorite word… change.
Since both men have espoused unique alternatives to our current system, the healthcare sector will see changes regardless though.
Look to renewable energy firms… no matter who wins
As for energy – one of the hottest spots on the market – both Obama and McCain support crucial efforts to explore alternative energy in order to relieve some of America’s dependence on getting energy from volatile nations.
Earlier this year, McCain even went so far as to offer a $300 million reward for anybody who could design a “battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars.” And both men attended former president Bill Clinton’s National Clean Energy Summit in Las Vegas, Nevada, back in August.
McCain has also thrown his weight behind greater offshore drilling and ‘clean coal’ production, right alongside ethanol production from corn. Obama has expressed more interest in other forms of alternative energy, such as wind and solar power – two areas that could receive more subsidies and mandates under his administration.
In this respect, ISI says solar leader First Solar (Nasdaq:FSLR), wind turbine manufacturer Vestas Wind Systems (OTC:VWDRY.PK) and waste-into-energy firms such as Covanta Holding (NYSE:CVA) could see benefits.
The battle for headlines: economy and market vs. Obama and McCain
The bottom line here is that while both candidates are busy championing their ideas and policy proposals to the country and certain sectors and stocks will benefit more than others from a regime change, the overall stock market isn’t going to be as affected as some people might think.
According to John Merrill, chief investment officer of Tanglewood Wealth Management, the market isn’t really paying that much attention to the candidates, no matter how much both like to speak out. “Today, the market and the economy are shaping events much more than the presidential election.”
• This article was written by Martin Denholm for the Smart Profits Report