Sectors to Watch this Election Season

This article published with permission from InvestmentU.com.

This past March, I wrote about presidential election cycles and how the market reacts in each of those years.

And what’s really interesting is what happens in election years compared to the rest of the term. Considering we’re in the midst of one, here’s a quick little recap of what we typically see in any given election year.

• In the fourth year of the presidential term — the election year — the stock market’s performance tends to be above average.

• Incumbent parties will play around with fiscal policy in a manner designed to inflate the economy just prior to an election and try to create voter enthusiasm.

Now consider these two added facts:

• The Stock Trader’s Almanac states that the S&P 500 Index has risen in the final seven months in 13 of the last 15 presidential elections.

• Since 1896, the Dow Jones Industrial Average has hit, on average, a 9% gain during election years when an incumbent president sought a second term. It doesn’t matter who wins.

So on a whole we expect the market to rise. However, who wins in November may tell us specifically where to place our money. So let’s look at sectors and plays that may hitch their future on who wins in November.

If Barack Obama is re-elected…

If President Obama is re-elected, expect business as usual. What I mean is that you’ll see a continuation of his policies, and that should prove big for certain industries, such as:

Drug Companies

This might not seem to make sense at first glance. What you have to look at is whether the fees imposed by the Affordable Healthcare Act will win out over individual mandate’s inflow of new patients.

Here are some important tidbits from Alex Morozov, director of the health care team for Morningstar:

“While the $85 billion in fees imposed upon drug companies over the next decade to help pay for Obamacare will negatively impact earnings, the individual mandate requiring all Americans to have government-approved health insurance will more than offset any losses… That’s a gigantic mitigating factor for pharmaceuticals… Even though they may take an earnings hit as a result of the fines, the mandate provides a very needed inflow of patients who were previously uninsured. And when patients have insurance, they tend to utilize it, so consumption of healthcare services and products tends to accelerate.”

Plays in this arena would be of the likes of Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ).

Homebuilders

Remember back in February of this year when Bob Nielsen, chairman of the National Association of Home Builders (NAHB), issued the following response to President Obama’s proposed legislation that would give refinancing aid for home owners and try to fix the housing market? Well if you don’t, here’s a refresher:

“The nation’s home builders commend President Obama for highlighting the vital role that housing plays in the U.S. economy, for recognizing the high value that Americans place on homeownership and for focusing on how to address the nation’s housing problems. Clearly, more decisive actions are needed to increase refinancing opportunities, to reduce the inventory of foreclosed homes and to prevent additional homes from going into foreclosure. NAHB looks forward to working with the Administration and Congress to find constructive solutions in these areas as soon as possible.”

Sam Stovall, Chief Equity Strategist for S&P Capital IQ, stated that an Obama re-election would give us the following: “As a result, we are likely going to end up with a leaner inventory of foreclosed homes, which therefore creates demand for new homes.”

As I’ve written in the past regarding this industry, think of Lennar (NYSE: LEN). If you’re more of a mutual fund or ETF investor, you probably want to take a look at the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB) or SPDR S&P Homebuilders (NYSE: XHB).

And if Romney takes office…

Dividend Payers

Stovall states that if Republican presidential candidate Mitt Romney wins in November, look for a boom for dividend-paying stocks, utilities, telecommunications and consumer staples.

Why? Romney would keep the dividend tax rate at 15% because he wouldn’t let the Bush-era tax cuts expire. Obama has stated that higher-end taxpayers could pay 39.6% on dividends if the cuts do expire. Also, there would be a new 3.8% tax because of the Affordable Care Act on passive income from dividends, interest and capital gains.

Here’s what S&P analysts have said are some of the dividend payers with the best recommendations: Philip Morris International (NYSE: PM), Altria Group (NYSE: MO) and Frontier Communications (Nasdaq: FTR).

Energy

Romney has also stated that he would allow for a substantial increase in the domestic production of oil and natural gas. The goal would be to have the United States totally sustainable on North American energy in eight years.

His plan would give a federal blessing for energy companies to “frack” away. There would also be permission to drill on federal land off the Atlantic. And I believe you would see an immediate green light for the Keystone XL pipeline project. Remember that the President has put off his decision until next year — assuming he has the authority to still make decisions.

Looking for a speculative energy play? We’ve done articles on little-known plays such as U.S. Silica Holdings (NYSE: SLCA) and Ecosphere Technologies (OTC: ESPH.PK) here at Investment U.

Some final thoughts

According to Jeff Hirsch, Chief Market Strategist with Stock Trader’s Almanac, “Overall, we’ve shown that the market does better under Democratic presidents, but the dollar does better under Republicans.”

Hirsch stressed that investors must exercise patience, caution and superior stock selection. He went on to say that he feels no matter if Romney is elected or Obama is re-elected, that the market will do well over the next two years.

Jason Jenkins is a part of the research team at InvestmentU.com. See more articles by Jason here.