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How to trade the US presidential election
With less than a week to go until the U.S. presidential election, traders have only a handful of sessions left to align their portfolios.


A Barclays survey of investors indicated that the consensus view is for a Romney victory to be positive for stocks, while an Obama victory would support bonds.


Traders may view a Romney presidency as catalyst for a more favorable environment for business, and therefore the equity market. On the other hand, an Obama re-election might mean a worse business environment, and thus funds would flow from equities into fixed-income.


Is this view realistic? Stocks under Obama have done remarkably well, with the S&P 500 more than doubling during Obama's first term. This remarkable performance has continued despite 2012's questionable business environment, confounding bearish investors who cite declining revenues and weak forecasts as fundamental reasons for why the market ought to be trading sharply lower.


It might not be the President who is affecting stocks, but rather the Chairman of the Federal Reserve, Ben Bernanke. As the Fed has followed an aggressive monetary policy through multiple rounds of quantitative easing, the stock market has gradually moved higher.


If Bernanke has been the one sending stocks higher, then keeping Obama in place would seem to be a better recipe for market success regardless of the underlying business factors. Although originally appointed by then President George W. Bush in 2006, Bernanke was re-appointed by Obama in 2010. With his term set to expire in 2014, whoever wins the presidential election next week will have the opportunity to nominate the next Federal Reserve Chairman.


According to reports published earlier this month, Bernanke -- even if nominated to continue his term -- will leave the Fed in 2014. Of course, Obama might be more likely to appoint a more dovish chairman as Bernanke's successor, one more concerned with the employment rate. On the other hand, Romney might appoint a more hawkish chairman concerned with keeping inflation at bay.


More interesting is the possibility that Romney may try to push Bernanke out the door prematurely, maybe even asking for his resignation. That seems unlikely, but could lead to turmoil in the markets.


Investors might look to specific sectors or companies for performance depending on the election outcome. With a Romney victory, stocks in the defense, energy and financial sectors might benefit. With an Obama win, traders might look to insurance, alternative energy and hospitals.

Should the country go over the "fiscal cliff," defense stocks might be battered on expectations of reduced military spending. Romney, if elected, would not be inaugurated until January 2013 -- after the fiscal cliff cut-off. The fiscal cliff carries a high degree of uncertainty, and it would be foolish to predict exactly how the issue will be resolved, if at all.


If recent actions are any indication of future performance, Congress will manage to find a way to extend the fiscal-cliff deadline just a bit longer. That would mean President Romney would be able to influence the outcome. In that case, Romney might be more likely to give priority to protecting the defense budget over Obama, thereby limiting the downside to defense names. Romney budgets, too, would likely include more spending on the military than Obama's, further boosting defense stocks like Lockheed Martin (LMT -0.24%) or Raytheon (RTN 0.00%).


As for financial stocks, the underlying companies could see better profits under Romney as president. Following the financial crisis, Obama signed the Dodd-Frank Act, establishing extensive new financial regulations. He also pushed for the Volcker Rule -- intended to stop the banks from proprietary trading.


Romney might not have any chance to abolish these rules, but if elected, his administration might hinder additional regulation -- a win for financials like JP Morgan (JPM +0.23%) and Citigroup (C +1.08%).


As for energy, President Obama has presided over a resurgence in American oil production. That said, Obama has blocked projects like TransCanada's (TRP -0.45%) Keystone XL pipeline. Romney as president may be more favorable to projects like Keystone, and push for expanded use of the nation's natural gas, and perhaps increased exports of liquefied natural gas. Companies like Cheniere Energy (LNG -0.75%) could benefit in that scenario.


And if President Obama is re-elected? S&P Capital IQ argued in September that the Obama administration has been supportive of telecommunications, and would continue to be so during his second term. Obama has encouraged broadband expansion and shifted wireless spectrum from television broadcasters to telecom providers. Verizon (VZ +0.82%) and AT&T (T +1.10%) are staple plays in this sector.


Alternative energy has been a favored industry for Obama's administration, and future Obama budgets could include more tax credits and subsidies for companies in the sector. Stocks like NextEra (NEE +0.03%) and First Solar (FSLR +2.25%) might see a notable boost during a possible second Obama term.


Finally, hospital stocks could rally if Obama wins next week.


After being confirmed as constitutionally permissible by the Supreme Court, the only possibility for Obamacare to be abolished would be under a Romney presidency. If Obama wins next week, Obamacare might be legal for the foreseeable future.


Under the provisions of Obamacare, more Americans are expected to be covered by private insurance. As it stands, hospital emergency rooms are legally required to treat people who do not have insurance -- weighing on their bottom line. With less of these emergency room free riders, hospitals might see their profitability increase in coming years. Stocks in this industry include Tenet Healthcare (THC +0.33%) and HCA Holdings (HCA -0.36%).


With only three full U.S. trading sessions left before polls open, traders should act quickly if they wish to rebalance their portfolios ahead of the election.

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