Presidential wannabes are pounding the pavement, shaking hands with the crowds and kissing babies. The campaign for the next U.S. president is starting to shift into high gear, and the potential political shift could open the door for a new wave of priorities and spending initiatives if a Republican wins the 2016 election.
Traditional thinking suggests that Republicans are the better stewards of business and economic performance, which in turn translates into stock market gains, but history shows otherwise.
“The market thinks it likes Republicans better, but the market does better under Democrats,” says Sam Stovall, managing director of U.S. equity strategy at New York-based S&P Capital IQ.
Stovall crunched historical stock market data and found that since 1969, the Standard & Poor’s 500 index performed better by a 2:1 margin, on average, under the three Democratic administrations in the period versus four Republican administrations.
“Since World War II, Democratic presidencies averaged an 11.2 percent gain in the S&P 500, versus a 6.3 percent gain for the Republicans,” Stovall says.
Digging deeper into sector performance, differing policy priorities could make a difference when it comes certain areas of the market. Here is a look at three stock sectors analysts believe could perform well under a Republican presidency, should the White House change hands.
Defense stocks. The conservative and right-leaning Republican Party generally advocates increased military spending, which in turn could boost defense-related stocks, including military contractors and aerospace equipment companies.
“The Republican Party has indicated almost universal support of reintroducing ground troops into the Middle East and increasing border patrol on our Mexican-U.S. border, which would mean larger defense spending,” says Joe Heider, financial advisor and president at Cleveland-based Cirrus Wealth Management.
Defense spending has been a low priority area for the Obama administration, says Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Massachusetts.
“Look for that to change in a Republican administration, with existing fiscal limits put aside for military spending. Development of next-generation war technology should drive significant sales growth for major military contractors and enhanced production of existing weapons platforms,” McMillan says.
Top defense stock pick. “Our favorite is Triumph Group Inc.,” Stovall says. S&P Capital IQ ranks Triumph (ticker: TGI) as a five-star stock with a “strong buy” recommendation. The stock is trading around $50 per share, and S&P Capital IQ forecasts a 12-month target at $90. “We see the TGI story as attractive, and it carries our strongest buy recommendation and is the only stock ranked five stars within the aerospace group. We feel optimistic because of the favorable outlook we have for the commercial aerospace market,” Stovall says.
Energy stocks. The beleaguered energy stock sector could benefit from a shift in presidential power. The Republican Party could benefit energy sector stocks via implementation of a reduced regulatory environment. That could include lower Environmental Protection Agency regulations, eased regulations for drilling in the Arctic Range, offshore, or new pipeline construction, Heider says.
Despite the massive increase in U.S. oil production in recent years, a federal ban prohibits U.S. oil exports. But that could change if the White House changes hands. Look for the Republicans to legalize exports of U.S. oil, McMillan says.
“With U.S. prices well below world prices and with production continuing strong, U.S. companies are very well-positioned to take market share from other producers and at the same time continue the job growth and investment that have, until recently, characterized the sector. By opening markets, U.S.-producing companies will be able to both grow in volumes produced and marketed, and also get higher prices for a double benefit,” McMillan says.
Top energy stock pick. Within the energy sector, Stovall points to Southwestern Energy Co. (SWN) as a favorite. The company explores, develops and produces natural gas and oil in the U.S. The stock has a five-star rating and a “strong buy” recommendation from S&P Capital IQ. It is currently trading around $17 per share, and S&P Capital IQ forecasts a 12-month target at $26.
Financial stocks. Government regulation has been a headwind for the financial industry, with higher capital requirements and stringent regulatory standards crimping growth in recent years. Republicans will opt for a more market-driven regulatory approach, allowing faster growth and higher margins in the industry, McMillan says. Also, “a Republican administration will most likely encourage the Federal Reserve to stop intervening in the market to keep rates low, resulting in higher margins,” he says.
Top financial stock pick. One avenue for investors to play the financials angle is through a broad-based exchange-traded fund that trades like a stock. The iShares U.S. Financials ETF (IYF) offers exposure to U.S. banks, insurers and credit card companies without any one specific company risk. Top holdings of IYF include Wells Fargo & Co. (WFC), Berkshire Hathaway (BRKB), JP Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC).
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Stocks to Buy if Republicans Win the White House originally appeared on usnews.com