An Investor’s Guide to the Presidential Elections
Posted By Barry Ritholtz On November 5, 2012 @ 7:00 am In Investing,Markets,Podcast | 3 Comments
The most important election of our time! The fate of the free world hangs in balance! Yadda yadda yadda!
Every four years, the usual clichés comes out. I suggest you ignore them, and instead focus on the policies that are unambiguously different, and have very different outcomes.
More specifically, between the policy pronouncements madde by candidates Barack Obama and Mitt Romney, what are the key differences in these policies that affect investors directly?
Asked differently, what does the outcome of the Presidential election mean for the investing public? I refer not to things that impact investors indirectly, like estate or income tax brackets; rather, what are the specific areas of significant disagreement, where substantial policy differences exist, and where the candidates’ different approaches have a meaningful impact on investors.
These include:
1. Let’s begin with a sector analysis. Three key areas where the policies of the candidates are so significantly different that the stocks in these sectors have begun to shift with the polls. They are Energy, Healthcare, and Defense.
Energy, a victory by Governor Romney will work to the benefit of Coal, Pipelines, and the Oil sub sector known as Exploration & Drilling. President Obama has been much friendlier to Wind, Solar and Electric Vehicles.
Romney would be a much easier administration in terms of allowing more drilling and exploration, especially in Alaska and on other public lands. Obama has been more environmentally protective. However, the President has been far friendlier to “Big Oil” than most of his supporters expected.
Ethanol: Neither candidate has committed to discontinuing Ethanol, a giant subsidy to Iowa farmers that has us burning food and befouling engines for no damned good reason.
One final energy note: Neither candidate has been especially aggressive about charging Oil or Mining companies full carry price for crucial resources they extract from public lands. Compared to nations like Norway, we grant licenses to the private sector far too cheaply. It would generate enormous revenues and help close the deficit if we charged closer to fair value for these assets than we do; instead, we subsidize these industries with giant giveaways at the taxpayers expense.
Healthcare probably has the starkest comparison between the two candidates. Under Obama, Insurers and Hospitals are likely to do well. Obamacare guarantees health insurance to millions of people who otherwise would not have coverage. This creates lots of new paying customers for the insurers (either privately or through the government); Emergency rooms will no longer act as free walk in clinics at Hospitals – their accounts receivable will improve immeasurably.
As far as big Pharma, I don’t see much of a difference. There is a possibility that a win by Romney could crimp stem cell research (again), but its less clear under Romney than under Bush how the research would fare.
Defense is simple: A Romney victory means more major weapons program purchases. A Romney win means you should look at the big providers of weapons systems, especially naval and aircraft manufacturers.
Finance: As much as Wall Street and big Banks are angry at Obama, he has been rather accommodating to them. I don’t see much of a difference between either candidate for finance, other than the tax loophole giving friendlier treatment of carried interest for hedge fund and private equity managers. (Obama would repeal it, Romeny would keep it). There has been some signs of Obama getting tougher on banks, suing Bank of America for its fraudulent mortgage underwriting. Relative to these other two sectors, however, there is only a small difference between the two when it comes to Wall Street. (see section on Regulations for greater differences)
For a list of companies in all of these sectors, see the Yahoo Finance Industry Browser (http://biz.yahoo.com/p/ [1])
~~~
2. Federal Reserve: There is an enormous sated difference between the candidates when it comes to their announced policies and philosophies regarding the Federal Reserve.
Governor Romney has stated he is against quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) of the past 5 years. He has stated he would not reappoint Ben Bernnake (who may be stepping down in 2014 regardless).
Some anaysts have noted that stock markets have been riding on a Fed induced sugar high. Jim Bianco, chief strategist at Bianco research, notes that the most recent market turmoil began after the first debate. Obama’s poor performance improved the odds of a Romney victory. After trailing badly in the polls, the possibility of a Romney appointed Fed chief, according to Bianco, spooked the markets who have become “addicted to an easy Fed.”
Romney is more likely to appoint a Fed chief who will normalize interest rates, and stop the extraordinary accommodations the Federal Reserve has provided to the capital markets.
Current Fed chairman Ben Bernanke has suggested he would step down when his term is up in Some of the names circulated as possible replacements by Romney have been John Taylor of Stanford and Glenn Hubbard of Columbia.
Addendum: We don’t know who will be Treasury Secretary (or other related positions) but we can assume these appointments will be similar philosophically to Fed appointments.
The president selects his Treasury Secretary, the head of the Council of Economic Advisors, along with other positions that can have a big impact on how policy gets executed. Important under normal circumstances, it becomes crucial during crises.
~~~
3. Investment Related Taxes
Obama versus Romney, Investor Related Positions
Sources: Dollarwise [2], Forbes [3], Presidential campaigns
~~~
4. Regulatory Approach/Legal
The key difference between the two candidates: Obama is more regulatory oriented; Romney is more deregulatory.Obama prefers some regulation, and was a proponent of Dodd-Frank.
Romney would like to see less regulation, would overturn Dodd Frank.Obama supports the Volcker Rule; Romney does not.
Neither candidate supports a restoration of Glass Steagall or the full repeal of the Commodity Futures Modernization Act of 2000. Neither would treat derivatives as insurance products.
In terms of litigation, the Obama adminsitration has (very belatedly) begun suing banks for mortgage fraud and misrepresentation; he has not pursued any actions against Wall Street firms. Romney has stated he would not pursue litigation against money center banks or Wall Street firms.
Every four years, the usual clichés comes out. I suggest you ignore them, and instead focus on the policies that are unambiguously different, and have very different outcomes.
More specifically, between the policy pronouncements madde by candidates Barack Obama and Mitt Romney, what are the key differences in these policies that affect investors directly?
Asked differently, what does the outcome of the Presidential election mean for the investing public? I refer not to things that impact investors indirectly, like estate or income tax brackets; rather, what are the specific areas of significant disagreement, where substantial policy differences exist, and where the candidates’ different approaches have a meaningful impact on investors.
These include:
1. Sectors: In particular, Energy, Healthcare, Defense PolicyBefore we begin, a caveat: What the candidates say and what they can and will actually accomplish are often two different things. I have no idea what policies either OObama or Romney as President will manage to get through Congress. What we are looking is the impact of their stated policies if enacted.
2. Federal Reserve Philosophy and Appointments (re: Interest rate policy)
3. Investment Taxes (Dividend Treatment/Capital Gains Taxes)
4. Regulatory Approach / Legal
1. Let’s begin with a sector analysis. Three key areas where the policies of the candidates are so significantly different that the stocks in these sectors have begun to shift with the polls. They are Energy, Healthcare, and Defense.
Energy, a victory by Governor Romney will work to the benefit of Coal, Pipelines, and the Oil sub sector known as Exploration & Drilling. President Obama has been much friendlier to Wind, Solar and Electric Vehicles.
Romney would be a much easier administration in terms of allowing more drilling and exploration, especially in Alaska and on other public lands. Obama has been more environmentally protective. However, the President has been far friendlier to “Big Oil” than most of his supporters expected.
Ethanol: Neither candidate has committed to discontinuing Ethanol, a giant subsidy to Iowa farmers that has us burning food and befouling engines for no damned good reason.
One final energy note: Neither candidate has been especially aggressive about charging Oil or Mining companies full carry price for crucial resources they extract from public lands. Compared to nations like Norway, we grant licenses to the private sector far too cheaply. It would generate enormous revenues and help close the deficit if we charged closer to fair value for these assets than we do; instead, we subsidize these industries with giant giveaways at the taxpayers expense.
Healthcare probably has the starkest comparison between the two candidates. Under Obama, Insurers and Hospitals are likely to do well. Obamacare guarantees health insurance to millions of people who otherwise would not have coverage. This creates lots of new paying customers for the insurers (either privately or through the government); Emergency rooms will no longer act as free walk in clinics at Hospitals – their accounts receivable will improve immeasurably.
As far as big Pharma, I don’t see much of a difference. There is a possibility that a win by Romney could crimp stem cell research (again), but its less clear under Romney than under Bush how the research would fare.
Defense is simple: A Romney victory means more major weapons program purchases. A Romney win means you should look at the big providers of weapons systems, especially naval and aircraft manufacturers.
Finance: As much as Wall Street and big Banks are angry at Obama, he has been rather accommodating to them. I don’t see much of a difference between either candidate for finance, other than the tax loophole giving friendlier treatment of carried interest for hedge fund and private equity managers. (Obama would repeal it, Romeny would keep it). There has been some signs of Obama getting tougher on banks, suing Bank of America for its fraudulent mortgage underwriting. Relative to these other two sectors, however, there is only a small difference between the two when it comes to Wall Street. (see section on Regulations for greater differences)
For a list of companies in all of these sectors, see the Yahoo Finance Industry Browser (http://biz.yahoo.com/p/ [1])
~~~
2. Federal Reserve: There is an enormous sated difference between the candidates when it comes to their announced policies and philosophies regarding the Federal Reserve.
Governor Romney has stated he is against quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) of the past 5 years. He has stated he would not reappoint Ben Bernnake (who may be stepping down in 2014 regardless).
Some anaysts have noted that stock markets have been riding on a Fed induced sugar high. Jim Bianco, chief strategist at Bianco research, notes that the most recent market turmoil began after the first debate. Obama’s poor performance improved the odds of a Romney victory. After trailing badly in the polls, the possibility of a Romney appointed Fed chief, according to Bianco, spooked the markets who have become “addicted to an easy Fed.”
Romney is more likely to appoint a Fed chief who will normalize interest rates, and stop the extraordinary accommodations the Federal Reserve has provided to the capital markets.
Current Fed chairman Ben Bernanke has suggested he would step down when his term is up in Some of the names circulated as possible replacements by Romney have been John Taylor of Stanford and Glenn Hubbard of Columbia.
Addendum: We don’t know who will be Treasury Secretary (or other related positions) but we can assume these appointments will be similar philosophically to Fed appointments.
The president selects his Treasury Secretary, the head of the Council of Economic Advisors, along with other positions that can have a big impact on how policy gets executed. Important under normal circumstances, it becomes crucial during crises.
~~~
3. Investment Related Taxes
Obama versus Romney, Investor Related Positions
| Policy | Obama | Romney |
|---|---|---|
| Dividend Taxes | Maintain current 0% and 15% tax rates on qualified dividends | Would maintain the current 0% and 15% rates on qualified dividends |
| Capital Gains Taxes | Maintain current 15% tax rates on long-term capital gains for couples with income under $250,000 (singles under $200,000); Over those incomes, taxes go to 20% | Would eliminate tax on capital gains, dividends and interest income for any taxpayer with adjusted gross income below $200,000 |
| HealthCare Tax | Would maintain the additional 3.8% Medicare tax included in the health care act on investment income. | Would repeal the 3.8% Medicare tax on investment income (as a result of repealing the health care act). |
| Municipal Bond Taxes | Would cap the tax benefit of municipal interest at 28%, effectively creating a tax of 8% or 11.6% for those in the top two tax brackets | No change in tax treatment |
| Corporate Tax Rates | Cut corporate tax rate from 35% to 28%; Would target oil and gas companies for higher taxes, would offer tax breaks for manufacturers | Cut them from 35% to 25%; Move to a territorial system, rather than taxing corporations on income earned overseas |
| Corporate Tax Deductions | Would ban unspecified tax deductions | Would eliminate unspecified tax loopholes |
~~~
4. Regulatory Approach/Legal
The key difference between the two candidates: Obama is more regulatory oriented; Romney is more deregulatory.Obama prefers some regulation, and was a proponent of Dodd-Frank.
Romney would like to see less regulation, would overturn Dodd Frank.Obama supports the Volcker Rule; Romney does not.
Neither candidate supports a restoration of Glass Steagall or the full repeal of the Commodity Futures Modernization Act of 2000. Neither would treat derivatives as insurance products.
In terms of litigation, the Obama adminsitration has (very belatedly) begun suing banks for mortgage fraud and misrepresentation; he has not pursued any actions against Wall Street firms. Romney has stated he would not pursue litigation against money center banks or Wall Street firms.
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