Tags: Romney | Obama | predict | gamble

Don’t Buy Romney or Obama Stocks!

By Jacob Wolinsky   |   Thursday, 18 Oct 2012 07:55 AM

It is every stock market and political analysts’ favorite time of year. The election is only weeks away, and thousands of people are predicting which stocks are the best buy for a Mitt Romney or a Barack Obama win. However, there are many problems with this type of investing (speculating is a much more appropriate name).

The first problem with election investing is determining who will win. Several weeks ago, everyone was predicting an Obama victory. Newsweek ran a cover article on what Obama would do in his second term. Now the polls are dead even.

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Since no one knows which one will be the next president, how can anyone “invest” based on the president? Let’s assume for a moment that speculators can hedge or buy stocks that will be profitable regardless of who wins (another stretch). Do they even have their assumptions right?

I am not a big fan of studies that predict stock market returns based on politicians, mainly for five reasons:

• The stock market is not efficient.

• Valuations, not politicians, drive market returns.

• The stock market is a leading indicator.

• What year you decide to start with makes all the difference.

• Inflation needs to be accounted for, and most studies just ignore it.

However, even if one assumes the five statements are false and, therefore, certain stocks will do better under a certain president, there is a big problem. Almost all the studies are based on the future and not what has been the case in the past. There is a massive difference between assumptions and historical events. Don’t believe me? The GOP is better for oil companies (so says the argument). So obviously oil stocks would do better under a Romney presidency, right?

Oppenheimer issued a report recently that showed in the past 24 years, oil stocks have actually done better under Democratic presidents than they have under GOP presidents. For example, Exxon Mobil has produced 10 percent annual gains under Democratic presidents and only 7 percent annual gains under Republican presidents.

No one cannot predict the future, whether it is the presidential elections or the stock market. And presidential policies do not drive the market as much as valuations do. Furthermore, it then becomes close to impossible to predict which stocks will do better based on a future president.

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To ‘play’ the presidential stock market game, speculators must assume all of the following four statements are true:

• It is possible to predict who will win the election.

• Stock returns will be driven by who the next president is.

• Stock returns will be based on what policies candidates plan to implement, not what actually has happened.

• It is possible to determine the specific stocks and sectors that will do well.

My two cents: If you want to gamble go to Vegas and put your extra money to better use.

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