President Barack Obama's second term in office will help health care, real estate and construction stocks to outperform the overall market over the next year while sectors such as mining, firearms, defense, and tobacco are likely to under perform and depreciate, reveals a new research by the University of Miami School of Business Administration.
The report, - titled "Political Sentiment and Predictable Returns," - 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, out-performed 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.
"Given the results, a smart investor could actually hedge the market. In knowing which industries will do well, investors can identify a better mix for their portfolios," 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.
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.
"Political Climate, Optimism, and Investment Decisions," - a second paper based on data from 1991 to 2002 by Kumar and Jeremy Page of Brigham Young University, 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.
According to the study, 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.
