STOCKS

No matter what the handwringing and drumbeating about energy policies before an election, what may happen and what does happen can be two distinctly different things, as we see time and again, notes Elliott Gue of Energy and Income Advisor.

In the run-up to the 2004 election, the financial media churned out countless articles about how defense stocks and large-capitalization pharmaceutical names would outperform if President George W. Bush were reelected. The same misguided pundits also prognosticated that renewable-energy stocks would thrive if John Kerry won the election.

Investors who followed this simplistic strategy fared poorly. In the 24 months after November 1, 2004, shares of the five-largest defense companies in the S&P 500 returned 13.2%, marginally beating the 9.4% gain posted by the overall index. But if you exclude Boeing’s (BA) 31.7% return, this basket of sure-fire winners underperformed.

A bet on large-cap pharmaceutical companies likewise failed to live up to expectations. The NYSE ARCA Pharmaceutical Index generated a total return of 4.5% in the year after George W. Bush was reelected.

Meanwhile, the Credit Suisse Global Alternative Energy Index surged more than 51% in the 12 months following George W. Bush’s reelection, besting the S&P 500 and the red-hot S&P 500 Energy Index’s 37.9% gain.

Four years later, Barack Obama defeated Republican nominee John McCain by a margin of 365 electoral votes to 173. Leading up to the election, the scribblers argued that alternative-energy stocks would reap the rewards of an Obama presidency because he would push to regulate carbon dioxide emissions and shower the industry with subsidies. Conversely, an Obama victory was expected to devastate the coal, defense, and pharmaceuticals industries.

These politically motivated investment strategies likewise fell flat. Although the Credit Suisse Global Alternative Energy Index returned a mediocre 13.7% in the first year after the election, investors who held on for the duration of President Obama’s first term suffered an 11.5% loss. Over this four-year period, the S&P 500 Energy Index rallied 43%.

Meanwhile, as we predicted in this publication’s predecessor, the formerly high-flying First Solar (FSLR) lost more than 82% of its value over the past two years, stung by reductions to government subsidies in Europe.

While alternative-energy stocks stumbled, shares of coal producers fared well in the first two years of Obama’s presidency. Focus List holding Peabody Energy (BTU), for example, surged 62% during this period. In short, investors who loaded up on alternative-energy stocks and avoided shares of coal producers followed a losing strategy.

On November 6, 2012, Barack Obama won the presidential election, securing at least 303 electoral votes. The Republican Party retained control of the House of Representatives, and the Democrats held their majority in the Senate, though they lack the 60-vote supermajority needed to block filibusters.

Shares of coal-mining stocks tumbled precipitously on November 7, with our position in Peabody Energy pulling back almost 10% on the day. Meanwhile, shares of First Solar and other alternative-energy stocks rallied out of the gate before giving up their gains when the market sold off into the close. This tumultuous trading session prompted an influx of questions about whether President Obama’s reelection had changed our outlook for the coal industry and our position in Peabody Energy.

We won’t argue that Obama’s second term will be a boon for coal producers, or dispute that a Romney administration wouldn’t have been friendlier to the industry. However, although President Obama’s reelection likely ensures that these regulations will move forward, his victory doesn’t warrant liquidating our position in Peabody Energy or investing in alternative-energy stocks.

For one, the stock market tends to price in election outcomes long before the votes are collected and counted.

Intrade allows participants to wager on the outcome of elections and other events. Users don’t bet against the house or a bookmaker, so the Web site provides market-determined odds that a particular candidate will win. Although Intrade isn’t perfect, the site has correctly forecast each of the past three presidential races.

For much of 2012, bets on Intrade suggested the President Obama had at least a 60% probability of being reelected. Although Romney’s odds of winning enjoyed a bounce in spring when the economy hit a soft patch, and also after the first debate in early October, the probability of a Republican victory never breached 50%.

In a similar fashion, the collective emotions, opinions, and expectations that drive the stock market would have priced in the potential for an Obama victory months before the outcome. Investors who buy or sell a stock after an election trade based on old news. In fact, shares of most US-based coal producers hovered near the low end of their 52-week range in the week of the election.

Enervated investors should also remember that the US president’s power, though considerable, is checked by the other branches of government. Not only does the GOP still control the House of Representatives, but the Democrats also hold a slim majority in the Senate; the president will need to compromise with Congressional Republicans to break the legislative gridlock.

Accordingly, we don’t expect the Obama administration to push through a carbon cap-and-trade bill through the GOP-controlled House of Representatives. And although the EPA doesn’t require Congressional approval to regulate emissions under the Clean Air Act, the recent court ruling on CSAPR serves as a reminder that the judicial branch can keep the agency’s power in check. EPA regulations can also be repealed, reinterpreted, or poorly enforced by subsequent administrations.

Moreover, some investors overestimate the state’s power in a free-market system while overlooking the importance of economic forces and the price system. Consider the ongoing struggles of the alternative-energy industry despite strong government support in the form of tax breaks, feed-in tariffs that ensure above-market prices for renewable energy, and loan guarantees for clean-energy companies.

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Tickers Mentioned: Tickers: BTU, FSLR, BA

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