Every election cycle comes the question: how to play the new presidency? With Barack Obama headed to Washington D.C., the conventional wisdom would say alternative energy and industrial infrastructure stocks will benefit, while pharmaceutical and energy stocks will suffer.
Unfortunately, conventional wisdom isn’t holding true this time around for one glaring reason: the economy.
“Anybody that played the 'Obama play' is getting killed,” said Art Hogan, Chief Market Strategist at Jefferies & Co. “It’s a different time. The 'Obama play' doesn’t work anymore because of the macro environment.”
While the Dow Industrials climbed 305 points Tuesday -- the biggest presidential day election rally in modern history -- stocks were retreating Wednesday, with the Dow down 96 points. The stock markets are lower on the year thanks to the sinking economy and frozen credit markets.
“The great unknown piece was the election,” but the economy took away that dynamic this year, said Hogan.
Consider infrastructure stocks. Under an Obama presidency, a second stimulus package may be in the offing, which should be a boon for nonresidential construction companies’ because money would go to rebuild the country's highways and bridges right? Not this time. Those companies' share prices are down significantly even with expectations of a second stimulus.
Or what about solar stocks? Obama wants to invest $150 billion in alternative energy, yet shares of alternative energy companies have been taking a beating because of declining oil prices. Not to mention the economic rescue package included the lifting of the tax credit cap on residential solar energy, something the solar energy industry had been lobbying for.
“Solar companies got everything they wanted already,” said Theodore Rudd O’Neil, an analyst at Kaufman Brothers, noting that solar stocks moved higher ahead of the presidential election’s outcome Tuesday. “It goes back to what happens with the economy. While the solar tax credit is useful and helpful, given people are losing jobs and making less money,” it makes it harder to get solar panels, even with the credit.
Financial stocks, which have taken their fair share of lumps, have already priced in more regulation regardless of who won the election. “We already know it will be a tougher regulatory environment for financial institutions,” said Hogan. It's not like investors woke up and said, "Oh no, new regulations are coming down the pike," he said.
Even Detroit car makers, which are expected to face increased chances of government aid once Democrats are in power, are likely to see those hopes dashed.
“The public is leery of an auto industry bailout,” said Kevin Tynan, an analyst at Argus Research. Democrats are sensitive to what their constituents think. According to Tynan, it will take hundreds of billions of dollars to bail out the auto industry, something the general public may not have the stomach to do -- and the government may not even have the cash.
But it’s not only the beneficiaries that won’t benefit. Companies that are expected to suffer like pharmaceuticals may instead see their stocks become buying opportunities.
“There will be more rhetoric in the near term than actual action,” said Les Funtleyder, an analyst at Miller Tabak & Co. and author of a book on investing in pharmaceutical companies. Because of budget constraints, he said health-care reform will be a longer term project, even though an Obama presidency wants the government to play a bigger role in negotiating the prices of drugs. Pharmaceutical companies, typically a safe haven in tough economic times, hasn’t been behaving that way, which also limits the downside because of a Democrat controlled House and Senate.
“The odds are pretty good if you go buy history that the market overreacts to the rhetoric,” said Funtleyder. “The reality will be a lot less than the rhetoric."
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