Research also predicts which sectors are likely to falter.
(December 06, 2012) — President Obama’s second-term win means health care, real estate and construction stocks are likely to outperform the overall market over the next year while sectors such as mining, firearms, defense, and tobacco are likely to underperform and depreciate. This according to new research out of the University of Miami School of Business Administration titled “Political Sentiment and Predictable Returns.”
The study, based on past returns from 1939 to 2011, found that during that period, in years when an incumbent Democratic president was re-elected, stocks in certain sectors including health care, real estate and construction, outperformed the market by about 6.4 percent. Stocks in sectors such as mining, firearms, defense and tobacco underperformed the market average by about 0.8 percent per year after those elections. On the other hand, when a Republican president was re-elected in this same period, stocks in those sectors outperformed the market by about 5.3 percent, while health care, real estate and construction stocks underperformed the market by about 4.3 percent over the following year
“Given the results, a smart investor could actually hedge the market,” said Alok Kumar, Gabelli Asset Management Professor of Finance at the UM School of Business, who conducted the study with Jawad M. Addoum, also of the UM School of Business. “In knowing which industries will do well, investors can identify a better mix for their portfolios.”
A second research paper, “Political Climate, Optimism, and Investment Decisions,” by Kumar, Yosef Bonaparte of the University of British Columbia and Jeremy Page of Brigham Young University, based on data from 1991 to 2002, predicts the re-election of President Obama will cause Democrats to make wiser investment decisions in the coming months while Republicans are more likely to make mistakes. “This is because Democrats will feel better about the economy and view domestic markets as undervalued and more likely to deliver higher returns,” said Kumar. “This drives them to hold more domestic stock and take greater risks,” said Kumar.
In contrast, the research shows, when their preferred party is not in the White House, investors perceive greater market uncertainty. As a consequence, they hold more familiar, local stocks; pick active mutual funds with high fees; and trade more actively. Perhaps not surprisingly, based on the increased trading frequency, the performance of their portfolios suffers.
About the University of Miami School of Business Administration
The University of Miami School of Business Administration is a comprehensive business school, offering undergraduate business, full-time MBA, Executive MBA, MS, PhD and non-degree executive education programs. One of 12 colleges and schools at the University of Miami, the School is located in a major hub of international trade and commerce and acclaimed for the global orientation and diversity of its faculty, students and curriculum. The School delivers its programs at its main campus in Coral Gables as well as at locations across Florida and abroad. More information about the University of Miami School of Business Administration can be found at www.bus.miami.edu.
University of Miami School of Business Administration
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