Q&A: Talking Politics

10/1/2012


Football may be America's most popular spectator sport, but presidential elections can't be far behind.

With campaign rhetoric taking over the airwaves and gobbling up newsprint, it's only natural for investors to start considering how political issues will affect portfolios. This week, we answer three political questions.

Q Who will be better for stocks, Obama or Romney?

A We could make an equally strong argument for either man. But in truth, nobody really knows.

The Romney case: Republicans have long been considered more business-friendly. While plenty of individual politicians chart their own course, Republicans as a party support policies that favor business. The 2012 Republican Platform pledges to "keep taxation, litigation, and regulation to a minimum," actions conducive to profit growth.

Of course, regardless of the new president's party affiliation, we will be dealing with a man, not just a party. On that front, Mitt Romney would also seem to be good for business. His experience working in the financial sector, as well as his campaign oratory, suggest he would give businesses freer rein to operate without government strictures. In addition, Romney's tax plan would reduce or eliminate taxes on investments for most Americans. Supporters claim this will spur more Americans to invest — and more money in the market is good for stocks.

The Obama case: Barack Obama is far from the first Democrat to spend heavily in an effort to boost economic growth. The 2009 bailout of General Motors ($24; GM) demonstrates his commitment to keeping the economy moving forward and limiting job losses. The 2012 Democratic Platform promises a continuation of spend-to-spur-growth policies: "We can't just cut our way to prosperity. We must out-educate, out-innovate, and out-build the world."

A 2003 study published in the Journal of Finance found that since 1928, stocks have averaged 9% higher returns with Democrats in office. Other studies illustrate similar trends.

Our take: This topic inspires a lot of conversation but few conclusions. Critics of studies showing Democratic outperformance cite the fact that economic change often lags political action, allowing the next administration to benefit (or suffer) from the policies of its predecessor.

Over the last 30 years, federal nondefense spending has averaged 2.4% of gross domestic product during Democratic administrations — and the same percentage with Republicans in office. Factor in defense, and Republicans have spent more than Democrats.

Handicapping elections is tough, and handicapping stocks based on election results even tougher. Don't let the election affect your asset allocation. Your best bet is a diversified portfolio of high-quality, reasonably valued stocks.

Q What will happen if Romney repeals Obamacare?

A A Romney victory would open the door for a repeal of all or part of the Affordable Care Act, commonly called Obamacare. While the long-term effect of the law as currently on the books is difficult to assess, we can draw some conclusions based on the performance of stocks since the Supreme Court ruled it constitutional on June 28. The S&P 1500 Health Care Sector Index has advanced 8% since the ruling, in line with the broader index.

Managed-care companies are at ground zero. They should receive about half of the estimated 30 million new insurance customers (the rest go to Medicaid). But new rules regarding reimbursements and government-backed competition could pressure profit margins. The S&P 1500 Managed Health Care Industry Index is down 3% since the June 28 ruling.

Obamacare established a 2.3% excise tax on medical-device makers and a tax on drugmakers ($2.3 billion in 2010 based on industry sales) to help fund reform. Since the Supreme Court decision, pharmaceutical and equipment indexes have slightly lagged the broader sector, suggesting investors expect the boost in business to mostly offset the taxes. The Health Care Facilities Industry Index has risen 5% since the ruling, and the influx of new patients should more than offset the effect of lower reimbursements.

The full effects of Obamacare are not yet apparent, but so far it hasn't been a disaster. A repeal of the law would probably lift managed-care stocks and hurt hospital stocks. Its effect on other health industries is unclear.

Q What is the fiscal cliff? Should I sell stocks before the economy falls off that cliff?

A Next year, the Bush tax cuts and the Obama payroll-tax holiday expire, emergency unemployment benefits dry up, and automatic spending cuts connected to last year's debt-ceiling deal take effect. Collectively, these changes comprise the fiscal cliff. The Congressional Budget Office estimates that without political intervention, the combination of higher taxes and lower spending will reduce GDP by four percentage points and cause the loss of 2 million jobs — enough to send the U.S. economy into recession.

Congress has had more than enough time to address this, and a permanent solution seems unlikely during an election year. But investors shouldn't panic.

Politicians will probably pass some temporary measures to put off final decisions, kicking the can to the next Congress. The CBO estimates that extending the Bush tax cuts and canceling the spending cuts would eliminate the problem. For now.


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