SURPRISE IN A MATCHUP OF PRESIDENTIAL STOCK PORTFOLIOS
c.2013 New York Times News Service
On Oct. 11, 2012, with only a few weeks before the presidential election, Wall Street was rooting for Mitt Romney, the Republican challenger from Massachusetts.
That was the assessment of a team of analysts at UBS, the giant financial services firm, who issued a report that day that now makes fascinating reading. They handicapped the election correctly, saying that President Barack Obama was nevertheless the overwhelming favorite. But they also gave practical advice to prepare investors for a victory by either candidate.
The analysts created two model stock portfolios. One contained stocks that they believed would prosper under the status quo — a divided Congress and the re-election of the president. The other was the Romney portfolio, containing a separate set of stocks that they expected to excel if there were an upset — a Romney victory accompanied by a Republican sweep of Congress. That would mean fewer regulations, more fiscal austerity and more military spending — or so they believed — and they picked stocks that should benefit.
Those two model portfolios were buried in the files — until last week, when they were unearthed by Chris Costelloe, an analyst with Birinyi Associates, a stock market research firm in Westport, Conn.
“I ran the numbers and thought the results were remarkable,” he said.
It turns out that the Obama portfolio has beaten the stock market by more than 2-to-1. Since the publication of the report through Tuesday, it had gained 57.8 percent compared with 26.2 percent for the Standard & Poor’s 500-stock index. (Costelloe assumed that each portfolio was made up of 100 shares of each of the stocks in it.) The Romney portfolio’s rise was 32.2 percent.
“We never expected the overall stock market to do as well as it has,” said Jonathan Golub, who wrote the report when he was still chief U.S. equity strategist at UBS.
Golub is now the chief U.S. market strategist at RBC Capital Markets, and he had forgotten about those election projections until I called him about them last week.
“In hindsight, it’s clear that we were wrong on some points, but we got a lot of things right,” Golub said.
Why has the Obama portfolio performed so well? It contained 14 stocks, and the logic for some of them was straightforward.
One was First Solar, the manufacturer of photovoltaic modules, chosen for Obama’s tilt toward alternative energy. HCA, the hospital company, and Alkermes, a pharmaceutical firm, were on the list because of the Affordable Care Act. The health care law was expected to bolster those stocks by increasing the number of people with health insurance — a result that may eventually occur but hasn’t been obvious so far, given the initial problems with the new federal website.
The group of stocks included Aflac because of Obama’s economic policies. Its insurance goes after “middle- to lower-income individuals,” who were expected to have more discretionary spending under the president than under Romney.
Those were some of the obvious choices. But the portfolio also included Alliant Techsystems, a military supplier that claimed a berth because of the perverse logic of Wall Street.
Alliant is a leading manufacturer of bullets.
“Gun control concerns could lead to people stockpiling bullets,” the report said.
In the Obama portfolio, Alliant shares rose 131.4 percent, second only to First Solar shares, which gained 155.5 percent.
The Romney portfolio has done better than expected, even in the absence of a President Romney.
That wasn’t predicted by the UBS team, nor was the extraordinary performance of the overall market.
“I don’t think it’s anything that President Obama has done,” Golub said. “It’s mainly the Federal Reserve.”
By keeping interest rates low — even now, despite an increase in long-term rates — the Fed and other central banks have kept the bull market roaring, Golub said.
That has helped the market overall, and it has fueled financial stocks like Goldman Sachs, American International Group, State Street and U.S. Bancorp, included in the Romney portfolio because the UBS analysts believed that Romney might roll back financial regulations. These include the Dodd-Frank Act and the Volcker Rule, which was approved last week and was intended to bar regulated banks from using customer money to trade for their own gain.
Under Romney, financial institutions would presumably have had more flexibility. Yet market returns suggest that the banks have no trouble enticing investors, even with Dodd-Frank.
The analysts had so many attractive alternatives for the Romney portfolio that they included 28 stocks in their selection, double the amount in the Obama portfolio.
“The list reflects what investors were really thinking about then,” Golub said. “The perception was that Romney would be better for the market, that there were many stocks that would be winners under Romney, and not so many under Obama.”
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Military suppliers like General Dynamics and Lockheed Martin were on the Romney list. So was a mining company, Joy Global, which was expected to flourish with fewer environmental restrictions on coal; and tobacco companies like Altria, Lorillard and Reynolds American, which pay high dividends. The analysts were concerned that taxes on them might rise under Obama. A Romney victory could set off an immediate market rally, they projected.
Instead, taxes on dividends have not risen, and while the market fell the day after Obama’s election, it has rallied extravagantly since then.
Why has the market boomed? The Fed, declining deficits and corporate profits are the usual answers.
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Would the market really have done better under Romney? That was the consensus on Wall Street, but it’s difficult to make that case today.
Calculations by the Bespoke Investment Group through Friday show that in Obama’s first 1,788 days in office, the Dow Jones industrial average has gained 15 percent, annualized.
That’s the fourth best for an equivalent period among all U.S. presidents since 1900, behind Bill Clinton, a Democrat; with 19.8 percent; Franklin D. Roosevelt, a Democrat, with 19.4 percent; and Calvin Coolidge, a Republican, with 18.6 percent.
What’s more, under Democrats, the market has gained 7.1 percent, annualized; under Republicans, only 3 percent.
“Wall Street always seems to favor the Republicans, but it’s done considerably better under the Democrats,” said Paul T. Hickey, Bespoke’s co-founder. “That’s a big disparity. People always argue about the reasons, but they can’t argue with those numbers.”