Obama Stocks Among Best After Re-Election as Rally Tested


 While history shows re-elected Republicans have had better stock-market performance, with an average 5 percent gain in the first year of their second terms compared with a 1.2 percent loss for Democrats, 2013 is on track for the best return in a decade.
While history shows re-elected Republicans have had better stock-market performance, with an average 5 percent gain in the first year of their second terms compared with a 1.2 percent loss for Democrats, 2013 is on track for the best return in a decade.

Even with the flawed roll out of health-care reform and uproar over spying, Barack Obama is enjoying one of the best stock markets for a re-elected president. Signs are building that it might not last.

This year’s 24 percent jump in the Standard & Poor’s 500 Index is the third-biggest annual rally after a president was returned to office since the 1930s, trailing Bill Clinton and Ronald Reagan, according to data compiled by Bloomberg. The index has climbed 108 percent since Obama became president, adding more than $10 trillion in equity market value.

Record Federal Reserve stimulus, interest rates around zero percent and a doubling of corporate profits since they fell to a five-year low in 2008 helped sustain stock increases under Obama. The rally that began just after he took office now exceeds the average length of bull markets by almost a year and valuations are up 18 percent in 2013. Add to that prospects for the Fed to curtail stimulus, threatening higher borrowing costs, and the outlook for further gains under Obama is grimmer.

“The president came in at a highly unusual time with markets in complete disarray,” Chad Morganlander, a Florham Park, New Jersey-based portfolio manager at Stifel Nicolaus & Co., which oversees about $130 billion, said by phone Nov. 6. “After the rally this year, we’re fairly valued at best. The next stage of this will have to be an improving economic outlook and earnings outlook well above where we stand.”

Republican Returns

While history shows re-elected Republicans have had better stock-market performance, with an average 5 percent gain in the first year of their second terms compared with a 1.2 percent loss for Democrats, 2013 is on track for the best return in a decade. This year’s rally in the S&P 500 is the broadest ever, with shares of Assurant Inc., Delta Air Lines Inc. (DAL) and 442 more companies rising, data since 1990 compiled by Bloomberg show.

The Obama administration is fighting a global backlash over revelations that the National Security Agency spied on foreign leaders, hacked into fiber-optic cables to get data from Google Inc. and Yahoo! Inc. and intercepted communications of Americans without warrants. The president also has been defending his Affordable Care Act this month after website glitches delayed thousands of people from signing up for the health-insurance exchanges.

The S&P 500 rose 0.5 percent to 1,770.61 last week after gross domestic product and jobs reports beat projections and Twitter Inc. (TWTR) almost doubled in its trading debut. The index climbed 0.1 percent to 1,772.28 at 10:13 a.m. New York time.

‘Muted’ Returns

The benchmark U.S. equity gauge capped its fifth straight weekly advance and hasn’t fallen more than 10 percent since October 2011, the longest stretch without such a drop since 2007, according to S&P.

“It’s unusual that we’ve gone so long without at least a correction,” Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, said from Philadelphia in a Nov. 6 phone interview. His firm oversees $58 billion. “If you just look at this from a valuation perspective, the market is rich. That doesn’t mean we have to crash, but it does suggest that going forward, your return assumptions for U.S. equities should be much more muted than they have been.”

Nine of the last 12 bull markets have ended in five years or less, data compiled by Bloomberg and Birinyi Associates Inc. show. The last cycle lasted exactly five years, with stocks climbing 102 percent from October 2002 through October 2007. The rally following World War II started in May 1947 and ended about a year later in June 1948.

Surprise Rise

At the start of 2013, Wall Street strategists forecast the S&P 500 would rally 7.6 percent to 1,534 by year’s end. The index surpassed that level on March 5, then climbed another 15 percent. Stock gains have come as the Fed held its benchmark lending rate near zero percent since December 2008. The central bank also purchased more than $2.3 trillion of bonds in a quantitative easing program meant to stimulate the economy.

“What you often find in the first year after elections is not very good because you get into periods where the policies are tightening back up,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion, said in a Nov. 5 phone interview. “But this period has been so mightily different because the Fed is doing a totally unconventional thing here.”

The biggest equity-market advance to follow a president’s re-election was in 1997 when Clinton started his second term. The S&P 500 gained 31 percent that year, extending a rally that began in 1990. That bull market lasted through 1998, with the S&P 500 up 302 percent, according to data compiled by Bloomberg and Birinyi.

Advance Prospects

More gains are possible in this bull market with interest rates likely to remain low for the next year and profits forecast to keep climbing, according to Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $367 billion.

“This can continue for a long time,” Creatura said in a Nov. 6 phone interview. “This isn’t physics, there’s no Newton’s Laws that state how long a bull market has to last,” he said. “If you’re going to forecast a market retracement you’ll have to come up with a reason why earnings will falter.”

S&P 500 profits beat analyst estimates by 4.1 percent last quarter and have avoided a contraction every quarter since 2009, data compiled by Bloomberg show. Analysts project they’ll climb 10 percent in 2014 and 2015. Corporate earnings reached a record $2.1 trillion for the quarter ending June 30, more than twice the $1 trillion at the end of 2008, according to data since 1947 from the U.S. Bureau of Economic Analysis.

Lowered Expectations

Analysts forecast more earnings growth next year even as economists predict the Fed will begin tapering its stimulus. The central bank will curb the monthly purchases to $70 billion from $85 billion in March, according to the median of 32 estimates compiled by Bloomberg. Projections for fourth-quarter expansion in gross domestic product fell to about 2 percent compared with an earlier prediction for 2.5 percent, data compiled by Bloomberg show.

Wall Street strategists say the S&P 500 will fall in the next two months, slipping 2.4 percent to 1,728 this year, according to the average of 19 estimates compiled by Bloomberg. This year’s rally has made stocks more expensive, with the index trading at 16.8 times reported earnings, compared with about 14.2 in January.

Growth Slows

Assurant (AIZ), the insurer of foreclosed homes, has climbed 72 percent in 2013, extending the rally since the bull market started to 245 percent. Per-share profit the last two quarters exceeded analyst projections. Earnings growth at the New York-based company will slow to 1 percent next year and 5 percent in 2015, when sales contract, according to estimates compiled by Bloomberg.

Delta Air Lines Inc. has surged 127 percent in 2013 as the carrier probably boosted profit 70 percent, analyst estimates show. The Atlanta-based company’s growth rate will slow to 1 percent next year, according to projections. The stock’s 2013 gain is the fourth-best of S&P 500 companies.

Hess Corp. (HES)’s 52 percent rally left the shares trading at almost 27 times reported earnings, compared to 9.9 in January. Earnings for the New York-based company are forecast to contract 29 percent in the first three months of 2014 after a 17 percent expansion this quarter, according to analyst estimates compiled by Bloomberg.

“Clearly earnings growth has been slowing,” Walter Todd, chief investment officer at Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a Nov. 7 phone interview. He helps manage $950 million. “We’re going to have to navigate that slowdown in earnings and monetary policy things like tapering. By definition it’s going to be harder to keep going higher like this.”

Babatunde Akinsola
Babatunde Akinsolahttps://naija247news.com
Babatunde Akinsola is aNaija247news' Southwest editor. He's based in Lagos and writes on the Yoruba Nation political issues, news and investigative reports

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