Viewpoint: Buy US post-election fears

Many investors, mostly American Republicans and non-American conservatives, fear President Obama's re-election will be toxic for shares. Nonsense - there is scant clear evidence either party is materially better for shares in the long-term. But there is a lot to be bullish about following this election that goes unnoticed.

Investors fear Obama, but why? Global shares are up since he took office in 2009, with US shares leading. US shares wouldn't be ahead if Obama were a market killer, but they rose every year - 26.5% in 2009, 15.1% in 2010, 2.1% in 2011 and 15.6% to date in 2012 - 71.8% cumulatively.

However, Obama didn't cause that bull market any more than he can be the primary cause of a bear market.

Though the colour of the presidential party hasn't mattered historically for shares on average, it can impact risk aversion at certain points in the election cycle. For example, as I've written before, average election-year returns are best when a Republican is newly elected (up 18.8%) and second best when a Democrat is re-elected (up 14.5%).

The pattern reverses in inaugural years, and returns are worst under a newly-elected Republican, averaging -0.6%. However, since World War II, US stock returns have been double-digit positive in every Democrat's inaugural year, whether first or second term, with the exception of Carter in 1977, when shares were down a mild -7.4%. (You see a similar pattern in global shares.) And shares were nicely positive in his remaining three years, up a cumulative 66.6%.

Shares boom in Democrats' inaugural years because they campaign on increasing regulations - which markets hate. That front-loads fears into election years - which are worse on average for Democrats than Republicans.

But in an inaugural year, markets are pleasantly surprised when the Democrat isn't able to do as much as feared. He can't pass as much extreme legislation - either because he doesn't really want to for a variety of reasons - or he can't due to gridlock. And with one exception, Obama faces more gridlock in 2013 than any other Democrat. Since World War II, under all second-term Democrats except Clinton in 1997, Democrats have also firmly controlled both houses of Congress. Obama can't pass much.

Many fear gridlock means the "fiscal cliff" - a mix of automatic tax hikes and spending cuts - will kill shares. This is a false fear. The fiscal cliff first loomed in 2010 - Democrats kicked it past the 2012 election. Doing that again for 2014 is a simple repeat of that same logic. They have a lot of vulnerable senators up then. They'll do what's politically useful. Going off the cliff isn't.

The US economy is doing better than people think and far better than the GOP campaign portrayed. With the election over, there's no need to endlessly beat the drum about the "lousy" economy, which will contribute to rising sentiment - as it did after 2008 and 2010.

Ideology is a dangerous bias in investing - blinding you to reality. Like or hate Obama's policies - it doesn't matter. What investors should care about is the capital markets impact. And there's no evidence a Democrat is disastrous for shares. It doesn't mean shares must rise in 2013. Rather, the fear shares must fall just because a Democrat was re-elected is simply baseless.

Fear of a false factor is always bullish. So buy the fear with stocks like these:

Oracle is the huge technology company folks hate to love. Everything about the world's dominant leader in enterprise software is edgy - from Larry Ellison down to its customisation techniques. This anti-Oracle bias is one reason it sells at just 12 times my 2013 earnings estimate. But Oracle's edge is one you can count on, which is why it will achieve continued moderate growth and is a bargain.

From a valuation perspective Royal Dutch Shell is the cheapest of the major oils. Better than any competitor, it's second in size only to Exxon Mobil. The consensus fears all the good, economic oil has been found. But evolving technology will find much more. Expect high single-digit growth. It sells at eight times my 2013 earnings estimate with a 5.1% dividend yield.

Note to the table: The S&P 500 Total Return Index is based upon GFD calculations of total returns before 1971. These are estimates by GFD to calculate the values of the S&P Composite before 1971 and are not official values. GFD used data from the Cowles Commission and from S&P itself to calculate total returns for the S&P Composite using the S&P Composite Price Index and dividend yields through 1970, official monthly numbers from 1971 to 1987 and official daily data from 1988 on.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.