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Post-election rally expected, strategists say

Updated: 11/05/2012 @ 3:21pm

Many bank strategists think Tuesday's U.S. elections could be positive for stocks, as they have historically gained after close presidential races, regardless of the winner.

Equity markets have rallied an average of 3% following nail-biters, according to analysis from J.P. Morgan Chase & Co. strategist Thomas Lee, who started with the 1940 race between Franklin Roosevelt and Wendell Willkie and measured the stock market's reaction in six other close elections.

"We believe this reflects the easing of uncertainty, which, as we know, tends to suppress equity valuations," he wrote in a note to clients Nov. 1.

But as investors wonder about the impact on stocks from the elections, many strategists say that, over the long term, there are certain sectors that stand to win or lose more than the broader market.

"Since the mid-1970s, equity markets have been indifferent to political outcomes," wrote Goldman Sachs' chief U.S. equity strategist David Kostin in a note to clients last month. "At the sector level, politics-and possibly policies-matter more."

Strategists see stocks getting a boost because investors will have a clearer picture of the outlook for key coming events, regardless of who is elected. One topic on which investors might gain clarity is the so-called U.S. fiscal cliff, where broad spending cuts and tax increases will be automatically enacted next year if Congress doesn't find other places to cut costs.

Among sectors, strategists say, the riskier areas look set to benefit from a win from Republican candidate Mitt Romney. Dividend payers, hospital stocks and global companies could benefit from a victory from incumbent U.S. President Barack Obama, they say.

That looked to be playing out in trading Friday, after a positive reading on the jobs market was interpreted by some as being advantageous to Mr. Obama. Risky sectors such as financials, energy and materials--all industries to which Mr. Romney has pledged support--dropped following the unemployment data. The materials, energy and financial sectors were among the biggest losers in the Standard & Poor's 500-stock index, which fell 0.9%. Materials lost 2%, energy shares dropped 1.7%, and the financial sector fell about 0.7%. Those groups are perceived as riskier partly because they tend to see bigger share-price swings relative to other sectors.

"I think the better jobs number is enhancing the probability of an Obama victory," Mr. Lee said Friday. "The market is reflecting diminished chances of a Romney presidency."

On the campaign trail, Mr. Romney has pledged support for the coal industry and U.S. energy production and said he would repeal the Dodd-Frank Act, a financial regulation enacted after the recession.

The Dodd-Frank repeal is expected to help financials, along with a possible change in Federal Reserve leadership. If Mr. Romney is elected, he has pledged to replace Federal Reserve Chairman Ben Bernanke. If he were to choose a chairman who pushed to raise interest rates, strategists say, it would help banks.

"A rise in rates and less harsh regulation would benefit banks the most," wrote Deutsche Bank strategist Binky Chadha in a note to clients last month.

Some of Mr. Romney's comments have moved industry stocks. On Oct. 4, when he said he supported the coal industry in a debate, coal stocks such as Alpha Natural Resources Inc. (ANR), Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) rallied strongly the following day, gaining 6.8%, 4.2% and 7.9%, respectively.

Areas that pay dividends, such as consumer staples and some large global companies such as McDonald's Corp. (MCD), are expected to benefit from a win from Mr. Obama, strategists said. Mr. Lee said low interest rates from a dovish Fed should keep yield-hungry investors in dividend stocks.

He also argued that companies with a global focus should benefit, as he thinks that Mr. Obama will raise domestic taxes on businesses, which could lead companies to focus more growth efforts abroad.

He thinks hospital stocks, such as Tenet Healthcare Corp. (THC), HCA Holdings Inc. (HCA) and HCP Inc. (HCP), would benefit from a victory from Mr. Obama, as a play on the health-care overhaul. Hospital stocks are expected to benefit from the legislation, as it would minimize potential losses from uninsured patients. Mr. Romney has pledge to repeal parts of the health-care overhaul.

Write to Alexandra Scaggs at alexandra.scaggs@dowjones.com
(END) Dow Jones Newswires
November 05, 2012 11:50 ET (16:50 GMT)
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