Was Dr. Seuss a stock and political pundit when he wrote, "Some are red. Some are blue. Some are old and some are new. Some are sad and some are glad. And some are very, very bad?"
That sums it up pretty nicely if you ask me. We have some serious choices to make during this election season, and the outcome will impact portfolios in a big way. It is best we be prepared.
The general assumption is that Republicans are good for the economy and Democrats are bad, but is that really true? Frankly, there is more to the story in that some sectors will do well under either administration and vice versa.
Recently, I wrote that the market was decreasing in value in June, not because of inflation, but because of anticipation of an Obama presidency combined with a Democratic-run Congress (see, "Election Season: A Great Time to Sell Stocks").
With Obama taking the nomination from his party and a lead in the early polls over McCain, the market could now focus on what an Obama presidency would mean for stocks and the economy in general.
Of course the initial knee-jerk reaction followed form, sending stocks lower in anticipation of implementation of many of Obama’s proposals.
Stock Market Sell-Off
I suggested that we can expect a sell-off of stocks as investors would prefer to pay a lower capital gains tax instead of the higher rate that Obama is proposing. Indeed, the market seemed to be anticipating such a move irrespective of the headline crisis in banking space.
That being said, what about the long term? Is it possible that an Obama presidency sets the stage of a significant rally? (Also read, "How to Keep This Rally Going.")
I think a good case can be made for that outcome. At the core of an Obama administration is a leveling of the playing field. For many of the last 8 years, the advantage has been to the large multinational companies.
We have a lot to gain by providing incentives for small businesses, and from what I can tell Obama seems to be in favor of doing that. Lowering health care costs for example may be one way to help small businesses reduce expenses thereby increasing profits.
The takeaway, then, would be for investors to look at owning small-cap stocks if Obama wins the White House. Doing so now makes sense anyway in that … > new business cycles are favorable to smaller companies.
Small-Caps To Buy Now
Historically we know that small caps outperform the larger caps at the start of a new rally. I would suggest looking at adding an exchange traded fund like iShares Russell 2000 Index Fund (IWM).
Obama figures to invest heavily in alternative energy. That means stocks in this segment should do well as we look to reduce our dependence on crude oil.
Given the risky nature of new technologies investors can own a diversified portfolio of alternative energy plays with an ETF like Market Vectors Global Alternative Energy ETF (GEX).
McCain’s impact on the market thus far appears to be negligible. The assumption is that a McCain Presidency would be a continuation of the current administration and therefore the market need not factor in any changes to policy.
The market has that wrong in my opinion. McCain is a maverick and as such the market should be anticipating some things here that may not be expected with your typical Republican administration.
Although he is in favor of more drilling to solve high oil prices, McCain does seem willing to invest in alternative energy like Obama. That means GEX would be in play here for investors.
McCain is also in favor of a strong defense with respect to the war on global terrorism. Defense company stocks like Lockheed Martin (LMT) and Northrop Grumman (NOC) should do very well with a McCain victory.
I would avoid the small cap stocks if McCain is the winner as there would still be the bias toward very large companies in his administration. In addition, I think stocks will be slower to rally as opposed to a complete change candidacy victory with Obama.
Both candidates will do infinitely better as opposed to the current administration. When the history book is written the scale of the failure will be even larger than we recognize at the moment.
To me that suggests that stocks will rally no matter if the winner is, red or blue.
For more information on the how the election could effect your portfolio, also read, "Beyond November: Politics and Your Money."
This article was written by Jamie Dlugosch, contributing editor to InvestorPlace Media. For more actionable insights like this, visit www.InvestorPlace.com.
