With the political conventions over and the presidential election now just two months away, investors are re-examining their portfolios. Some sectors and stocks figure to do well if President Obama is re-elected, while others should benefit if challenger Republican Mitt Romney moves into the White House.
But some caution that it may be tougher than usual to predict the outcome of this election, let alone figure out how to make money from the results. Indeed, some Wall Street pros detect more caution than in some past years among investors playing the election game.
James Bianco, who runs trading and research firm Bianco Research in Chicago, says financial markets aren't yet placing big bets on either President Obama or Mr. Romney. He cites polls and the popular online prediction market Intrade showing the candidates neck and neck.
Conventional wisdom holds that the stock market does well when a Republican wins. Presidents from the GOP tend to favor lower taxes and less spending, analysts say. Some go as far as to say the stock market's strength this year comes as Mr. Romney's chances of victory have improved.
But the policies of presidents don't always match their campaign planks, and post-election returns also don't always fit a clear pattern, suggesting there's just so much a president can dictate when it comes to the stock market. For example, the Dow Jones Industrial Average fell 7.5% in the 12 months after Ronald Reagan, a Republican, won the presidential election in 1980. But it rose 12.8% the year after he was re-elected in 1984.
The Dow soared 23.3% in the year after George H.W. Bush, also a Republican, was elected in 1988. But the average also jumped 12.6% after Democrat Bill Clinton was elected in 1992 and rose 26.5% after he was re-elected in 1996.
Overall, data from Citigroup point to better returns under Democratic presidents over the course of their terms. The market also tends to do better when a challenger wins, data shows.
A better bet is to focus on specific sectors that might outperform if a candidate wins. Tobias Levkovich, Citigroup's chief U.S. equity strategist, says "a Romney victory may benefit several industries such as energy, health care, defense, utilities and financials."
Financial shares could rise because Mr. Romney has pledged to repeal various restrictions of the Dodd-Frank financial-regulation law, Mr. Levkovich says. Defense stocks may be helped because the industry currently faces major spending cuts, but Mr. Romney has pledged his commitment to defense spending, analysts note.
John Brynjolfsson, who runs hedge fund Armored Wolf, is a fan of technology and green-energy shares if Mr. Obama is re-elected, because he's considered more open to spending in this area, and recommends PowerShares Cleantech Portfolio (PZD)
An Obama victory also could help Microsoft (MSFT),
Mr. Brynjolfsson says if Republicans take control of both the White House and Congress, shares of insurers like Cigna (CI)
Mr. Bianco also agrees health-care shares likely will do well if Mr. Romney wins, and will suffer if Mr. Obama returns to the White House, because his re-election would assure that his health-care reform program is implemented.
"If you think President Obama will lose his job, bet on the managed-care companies to outperform," says Jack Ablin, chief investment officer at Harris Bank. One example: UnitedHealth Group (UNH)
If Mr. Obama wins, defense shares could falter, Mr. Bianco argues, as spending comes under scrutiny. Mr. Romney, however, likely will focus on cutting taxes, potentially giving defense shares, such as Northrop Grumman (NOC),
An Obama victory "hurts defense as the automatic cuts agreed to last year happen," Mr. Bianco said, referring to the deal to raise the debt ceiling. A win by Mr. Romney "helps defense [stocks] because he will try to repeal these cuts, which means a de facto increase in defense spending."
Many investors are focused on energy shares ahead of the election. Democrats have been more hostile to hydraulic fracturing, or fracking, a type of drilling that's opening up natural-gas and oil deposits around the country but some worry could have environmental danger. Some specialists in the area fear a second-term Obama administration could be more likely to restrict this kind of drilling.
Mr. Romney, by contrast, has embraced the energy industry. He's tapped Harold Hamm of Continental Resources, one of the nation's newest oil titans, as a top energy adviser. And he has said he will encourage more drilling by cutting red tape for drillers and opening up new areas, as well as embracing the controversial Keystone pipeline.
Mr. Romney has promised to cut taxes. To pay for any such move, there's been discussion about eliminating or partially closing loopholes and tax breaks, perhaps including the mortgage-interest deduction. That could hurt housing-related shares, though some experts doubt these deductions would be eliminated.
If Mr. Romney trims government spending, as he has promised, construction-related companies that benefit from infrastructure spending also could be hurt.
But investors shouldn't shake up their portfolios just because the election is near. Near-term corporate earnings, the European debt crisis and potential moves by the Federal Reserve could have more impact on the overall stock and bond markets over the near and medium terms than who is elected president. And it's not yet clear what priorities President Obama or Mr. Romney would have as the next presidential term begins.
Congressional elections also will matter. Even if Mr. Romney wins, his administration may not be able to repeal the bulk of Mr. Obama's health-care changes unless the Republicans also win Congress, Mr. Bianco notes.
Investors generally should try "to buy companies that will do well no matter what policy or president or party is in charge," says Jeffrey Rubin of investment firm Birinyi Associates.