Building An Election Portfolio: What Stocks To Own

As if investing in a post-financial-collapse world isn’t hard enough, consider the latest worry the markets will have to deal with in the coming weeks: The outcome of the presidential election.

This year’s contest, like most others, hinges on the economy — or to be more precise, how to make it grow faster than it has grown over the past four years. Both President Obama and his Republican challenger, Mitt Romney, offer differing visions to meet that goal, and both visions offer opportunities for investors.

First, a couple of caveats: These are not recommendations to buy particular stocks, since investing in specific companies requires more precise research. Nor do they take into account every political scenario such as a complete change in the current makeup of the House of Representatives, the Senate or both. And the portfolios assume no substantive change in Federal Reserve interest-rate policy at least for the next year.

Rather, use these portfolios as guide posts for future investing decisions with the knowledge that in this market even the best laid plans often go awry.

The Obama Portfolio

The markets have recovered from their lows during president Obama’s first few months in office, fueled in large part by fiscal and monetary stimulus, and a recovery of the banking sector from its near-death experience in 2008. Still, it’s safe to say that most investors believe a second Obama term is bearish for the economy and stocks given his intention to raise taxes (both personal income taxes and capital gains), and as the impact of the ObamaCare mandate is fully felt by businesses.

Throw in the fact that the president has also shown little skill in bipartisan deal making, and you have another negative for the economy and stocks.

That said, McDonald believes hospital HMOs and insurance stocks are likely to benefit from the health-care mandate as more people are forced to seek coverage, particularly through HMOs. McDonald also likes food makers, such as Kraft (KRFT), and alcohol stocks like Anheuser-Busch (BUD) —stocks that generally outperform during a slow growth economy.

Other investments that should benefit from this environment: Investment-grade bonds of big companies like IBM (IBM) because they offer yield and have low default risk. McDonald says for the super conservative investor, the 10-year Treasury bond might be a good place to park some cash, and for the other extreme, those investors willing to roll the dice can bet on what he says will likely be a volatile stock market and trade an index that tracks this volatility known as the VIX.

The Romney Portfolio

Again, buying the stock market during the Obama presidency was one of the best market bets in years; after hitting lows of around 6,000 in March 2009, the Dow Jones Industrial Average has soared more than 100% to above 13,000 today. And yet, most small investors (as opposed to professional traders who have benefited the most for the rally) are playing it super safe by yanking money from stock mutual funds for safe havens like Treasury bonds or gold.

Why the disconnect? There’s no one answer. The S&P 500 was off almost 50% from its 2007 highs the day President Obama took office. One could argue just about any other sitting president could have had a higher stock market after that type of crash.

Meanwhile, talk to average investors and they’ll tell you that they remain wary of everything from the economic policies of the White House (higher taxes and government investments in questionable green energy businesses), the Fed printing money (QE 1-2-3) to the general dysfunction of the markets (flash crashes).

Some of which, of course, is out of the president’s hands. Still, sophisticated investors like McDonald say all things being equal, a Romney presidency should be bullish for the markets.

From the start, the chance of a budget deal to address the budget deficit and avoid the so-called fiscal cliff looming at the end of the year is much greater, particularly if the Republicans hold the House and even if the Democrats control the Senate, since Romney has worked such bipartisan deals in the past, namely as Governor of Massachusetts.

Dodd-Frank, the post-crash fiscal reform law, will likely be re-examined, with its most onerous parts either watered down or done away with. Candidate Romney has vowed to dismantle ObamaCare, and his running mate Paul Ryan has offered a comprehensive tax reform plan that lowers marginal tax rates, and plugs (still unspecified) loopholes to generate revenues.

With the caveat that the European financial system doesn’t deteriorate further, McDonald says bank stocks should do well during a Romney presidency, particularly blue-chip names like JP Morgan (JPM) and Goldman Sachs (GS).

He also like medical device makers, which are poised to get hit with taxes if ObamaCare is fully implemented, and he likes defense stocks because he believes in his second term president Obama will make sizable cuts in the defense budget. Romney has vowed he would not.

An improving economy should also help high-yield debt (lower rated corporate bonds) and municipal bonds. OK, analyst Meredith Whitney’s doomsday prediction of large muni defaults never materialized, but states and cities remain under tremendous fiscal pressure given the continued slow economy. McDonald says most market strategists believe the best way to revive the economy is for a tax overhaul along the lines advocated by Paul Ryan and that should boost muni bond prices.

The Fiscal Cliff Portfolio

Market experts say the so-called fiscal cliff is the biggest concern faced by investors in the next year. It’s called the fiscal cliff because without a compromise, under law, the next president must enact a series of massive tax increases and Draconian budget cuts, particularly to defense, that could send the economy back into double-dip territory, and roil the stock market.

What are the chances that we’re heading for that cliff? Pretty high, depending on the outcome of the election and the makeup of Congress. McDonald sees the likelihood of a fiscal-cliff scenario strongest if President Obama wins a second term, the Democrats take more seats in the Senate, and the Republican maintain control of the House.

His thinking goes something like this: President Obama will be emboldened to push through his agenda of higher taxes and defense cuts, and Republicans, fearing the revolt of fiscal conservatives and Tea Party candidates, will hold the line. Gridlock will force us over the cliff.

In that situation, head for cover. McDonald recommends Treasury bonds, and recession-resistant stocks like food and alcohol listed above. Sell anything with risk tied to economic performance, like high-yield debt, retailers and airlines.

And pray.

Source: Fox Business

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