By Greg Jensen
Political opinions are generally not a good basis to trade from. This applies equally to both sides of the aisle. It could be the rabid Republican, who has stayed out of the market since 2008 because he or she just knows that a Democratic president is bad for the economy. Or, it could be the loony lefty who has continued to pour money into alternative energy stocks, even though they have tanked since 2009, but he or she is convinced that sooner or later the rest of the world will realize just how important this field is.
Either way, each individual’s political opinions are deeply-held emotional beliefs, and emotions generally make for bad trades.
On the other hand, political events such as elections can provide investment opportunities. If you can check your opinions at the door, you will be able to see that regardless of who wins the White House, there may be trades that will make sense.
Going into this election, “uncertainty” seems to be the buzzword. A clear winner in this year's presidential election should result in upward momentum for the stock market, particularly in the first couple of days following the election. Should the vote be too close to call immediately, an uncertain outcome would have the opposite effect, resulting in downward pressure.
Romney is perceived as more business-friendly than Obama, Consequently, a Romney win could provide more of a push while an Obama win could lead to more of a drag on prices. Combine these factors and a clear Romney win should provide the biggest pop and a muddled Obama win the biggest drop.
I don’t think it matters which way the market moves initially. The key is to be contrarian. In reality, in the short term at least, nothing will have changed. Growth in China and India will still be slowing. Europe will still have its problems. Unemployment will still be around 8%. The U.S. economy will still be grinding slowly out of a deep recession. Corporate profits will still be high.
Any upward move would represent a good time to get well-paid for covered calls and any downward move would represent a good buying opportunity for long-term holdings. You can expect that this will be particularly exaggerated in the “hot button” sectors. If you own stock in big oil companies such as Exxon Mobil (XOM) or defense contractors such as Lockheed Martin (LMT), the short-term effects of a Romney win may enable you to make good money selling calls. The same goes for alternative energy stocks in the event of an Obama win. Should the market fall, then buying large companies with solid profit records, such as Apple (AAPL) or Wal-Mart (WMT) will likely pay off in the long run.
It is not that the President is irrelevant; it’s just that the initial reaction to the election is likely to be overdone. Basing trading and investment decisions on one’s own political biases or the campaign promises of politicians is a mug’s game. It is better to act on what you see rather than what you believe.