Getting Tough to Play the Election

 | Oct 31, 2012 | 3:59 PM EDT
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Last April, when it became apparent that Mitt Romney was to become the Republican presidential nominee, I wrote that the three primary issues of the campaigns and the election would be the Dodd-Frank law, President Obama's healthcare-reform law (or "Obamacare") and taxes.

This is a good time to reiterate and review those issues, and I suggest reading the original column again.

Since that column appeared, Romney has won the nomination and stated that, if elected, he would replace Ben Bernanke as Federal Reserve Chair when Bernanke's current term ends Jan. 31, 2014. I originally expected that this announcement simply represented pandering to the conservative end of the Republican base in order to shore up support, but Romney has since reiterated this numerous times. This presents a conundrum, because Bernanke's actions since 2008 have been supportive of the banks who, in turn, are Romney's greatest financial supporters.

Bernanke himself indicated just a week ago that he would probably not seek or accept a third term as Fed Chair, regardless of who wins the presidency, but it is unclear whether this had been known by Romney ahead of time. When the latter first made these comments following the Republican National Convention, Obama's chances of reelection had been at 80%, much higher than they are today, and Romney's chances had been at only about 20%.

For the money centers -- those entities most affected by Bernanke's policies -- shares all rose following Romney's comments and before the Fed announced a third round of quantitative easing. All told, this bizarre situation in itself muddles any attempt at trying determine the impact of a Romney or Obama election on the financial sector. Although traders enjoy uncertainty and the volatility in asset prices that comes with it, investors have not withdrawn from the sector as a result.

The two healthcare stocks I originally noted, HCA (HCA) and UnitedHealth (UNH), spent most of this year stable and did not begin to decline until just a few weeks ago -- commensurate with the rapidly increasing chances of a Romney win over that period. This action is in keeping with what I had originally discussed, but the decline in values is still too small to indicate that investors are forecasting a Romney win and the repeal of Obamacare that would seem likely to follow.

The tax issue is also presenting a bit of a conundrum. Romney claims have increased support for military spending, no matter who wins, but the Presidency the fiscal cliff issue will have to be resolved before any other budgetary issues can be made. The stocks of the two largest government contractors, Lockheed Martin (LMT) and Northrop Grumman (NOC) have increased around 16% and 20%, respectively, in the past five months; reflecting no concern about the fiscal cliff.

The bottom line is that, so far this year, the stocks of companies most directly impacted by the results of the elections have exhibited little to no correlation to the political process.

The common theme among them all appears to be an exclusive focus by their investors on prospects for the Federal Reserve to continue to make capital available to the financial sector, regardless of the election results.

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