Not many people realize that the stock market is one of the best predictors of the outcome of a Presidential election. So the best way for investors to determine whether President Barack Obama will win another four years in the White House is to watch what the market does.
The stock market over the years has been one of the most consistent forecasters of the results of the presidential polls. Since 1948, the Standard & Poor’s 500-stock index has proved to be a reliable prognosticator of whether or not an incumbent President gets to be reelected, says Sam Stovall, Chief Equity Strategist at Standard & Poor’s Capital IQ.
“The S&P 500 did an excellent job as an election-prognosticator technique” in the past 62 years, with an accuracy rate of 88%, notes Stovall, who is also chairman of the S&P investment policy commmittee.
Here’s what the record shows: The S&P 500-stock index price performance in the three months leading to a presidential election has been a good predictor of whether a sitting President would be reelected or replaced. Specifically, when the S&P 500 index rises from July 31 through October 31, the incumbent President ends up being reelected. But when the S&P posts a loss during that three-month period, the incumbent gets booted out of the White House.
“So pay close attention to the market’s performance in the three months from July to October leading up to the Novvember presidential election,” advises Stovall. “It will probably do a better job than the plethora of political pundits prognosticating on the presidency,” he argues.
The S&P 500 has also been a good guide for investors in several other important ways. One of them involves the so-called January Effect, which proclaims that how the stock market does in the month of January indicates how stocks will do during the year. The January barometer has been proved right in forecasting positive calendar-year performances almost 100%, says Stovall.
Then there’s the frequency with which the S&P 500 has risen during the presidential election years — which has been proved to be right 75% of the time. Add that to the fact that the index has been successful in predicting 88% of the time the fate of the incumbent President and they all make up for whatever the S&P 500 doesn’t provide in absolute return, says Stovall.
Another relevant question for investors is what stock groups perform the best during a presidential election year. The answer would surprise many: Since 1972, the S&P 500 Energy sector posted the strongest results during the presidential election year, gaining an average 15.6% — beating the market 80% of the time — vs. the S&P 500′s average 5.9% advance. Consumer staple stocks came in second with the sector gaining an average of 10.2%. Industrial stocks also outperformed.
Be cautious, however, about the information-technology stocks, as well as the materials and telecom services groups. Some of the individual stocks in the sector may perform well but as a group they recorded the weakest performance during presidential election years, notes Stovall.
So which stocks will do well in this presidential election year? Here are 10 strong-performing stocks that some savvy pros expect will outperform the market in 2012:
1. Boeing (BA), the world’s second largest maker of commercial jets (behind Airbus) and the third largest military weapons manufacturer, whose shares closed on Jan. 6, 2012, at $74.62 a share. The stock has been a standout performer in last year’s extremely volatile market, hitting a 52-week high of $80.65. Analysts see the stock climbing higher, to $86-$90 a share.
2. CVS Caremark (CVS), a leading operator of a chain of retail drug stores and pharmacy benefit management services in the U.S., currently trading at $41.46 a share. The bulls see the stock hitting $50 or more this year.
3. CBS (CBS) one of the major U.S. media and entertainment companies with ownership interests in broadcast and cable TV networks, radio, book publishing, and interactive businesses. Its stock closed on Jan. 6 at $27.99. Some pros expect the stock to run up to the upper $30s in 2012.
4. Celgene (CELG), a global integrated biopharmaceutical company developing therapies for cancer and immune inflammatory-related diseases, currently trading at $67.25. Some analysts are betting the stock will hit $90 this year.
5. General Electric (GE), the globally known and widely diversified technology and industrial company, with products ranging from aircraft engines and power generation to household appliances and industrial products. With its stock driving up to $18.70 a share this year from a 52-week high of $14, some analysts expect the stock to rise to the mid-$20s this year.
6. Microsoft (MSFT), the world’s largest software company, known worldwide for its Windows operating systems and Office applications suite, whose stock has pumped up to $28.02 a share, up from a 52-week low of $23. S&P expects the stock to climb to $33 this year. The cash-rich company stock pays a dividend yield of 2.85%.
7. Norfolk Southern (NSC), a railroad company that operates 20,000 route miles in 22 Eastern states and Canada, with an intermodal and coal service network as wellas a flourishing general freight business. Its stock is trading at $75.36. The stock is worth $85 a share, according to S&P.
8. United Parcel Service (UPS), the world’s largest express package and delivery company, which also offers various logistics and financial services. Its stock is trading at $73 a share, not far from its 52-week high of $77. The stock is expected by some analysts to hit $95 a share in 2012.
9. U.S. Bancorp, a Minneapolis-based bank, is the fifth largest bank in terms of assets in the U.S., with assets of $330 billion. Its stock is trading at $27.75 a share, close to its 52-week high of $28.94. It is expected to continue to climb.
10. Whole Foods Market (WFM), owner and operator of the largest U.S. chain of natural and organic food supermarkets, now trading at $72.88, which is also near its 52-week high of $74.45 a share. The rise in demand for its products should boost the stock to higher levels — no matter who wins the 2012 presidential elections.