Elections, stocks & shares...

[tp6626]

Anyone have any idea what sectors typically do well on a government change after elections?

I have a feeling that a government change upsets things somewhat. Rocks the boat a bit, and makes funny things happen in the stock market.

So, does anyone have any ideas what kinds of stock come out of such events stronger?

---------- Post added 03-14-2010 at 03:22 PM ----------

Oh I forgot to mention, I'm also interested in when governments cut public spending. What industries are relatively unaffected, or even benefit when that is the case?

[Mader]

It depends on who is leaving and who is going into office.

Wall Street can make money under any government, but they just need to know the rules - this is why Wall Street was so slow after the President's election and first few months in office.

[tp6626]

Let's just say in the UK, whoever is left in power is going to end up having to clean up all this economic mess one way or another. That's going to mean raising taxes substantially, whilst cutting spending.

So I'm racking my brains thinking who's going to flourish in those conditions?

[Tristan]

Any firm with prospects on a government contract stands to gain when taxes are raised. Everyone else gets mauled. Individual cases probably vary wildly.

If I had any money that I was willing to bet on fundamentals like elections (and I don't), I would buy straddles if I thought power would change hands completely. I would sell straddles if I thought coming elections would not result in different leadership. New leadership brings new policies, and the mere prospect of changed policy creates touchy price sensitivity to news developments. Straddles on what? Debt, currency, commodities, sector funds; basic stuff.

I would avoid taking a bullish or bearish stance in the market based on an election; rather, take a volatility stance (aforementioned). Either a known quantity gets elected, or an unknown. Clarity or uncertainty-- not hope or despair-- are the universal reactions to elections.

[tp6626]

It's going to be uncertainty, and I'm holding out for volatility. I think that the uncertainty will see an over-reaction in the FTSE, which hopefully will be a good time to buy.

Anyway, I have some questions:

a) What do you mean by straddles? I've never heard of them. Are you talking about shorting or spread-bets or some similar betting type tool?

b) What do you mean by prospects on a government contract? Do you mean working on projects which are directly funded by the government?? In this case, I cannot see how raised taxes would affect them directly. I can, on the other hand, see how spending cuts would affect them, as certain projects are cancelled or scaled-down.

[Tristan]

a) What do you mean by straddles? I've never heard of them. Are you talking about shorting or spread-bets or some similar betting type tool?

b) What do you mean by prospects on a government contract? Do you mean working on projects which are directly funded by the government?? In this case, I cannot see how raised taxes would affect them directly. I can, on the other hand, see how spending cuts would affect them, as certain projects are cancelled or scaled-down.

Straddles are a kind of option spread where you buy both the put and the call. It's a bet that there will be movement, with no commitment on your part as to the direction of that movement. The risk is not from the north or south, but that the market will simply stand still and slowly crush the value of both options on their march to expiry. But if you're expecting more dangerous times than others do, definitely look into buying a straddle on something.

By "prospects on a government contract," I meant a firm that's likely to be able to bid for government contracts if they come up. It was just a cynical remark, though... not meant to be taken as trading advice :undecided: It's just that in the long run, we observe that governments are readier to find new ways to spend tax revenues than they are to pay off loans. Thus, increased taxes bring the likelihood of new government contracts popping up. And since securing a government contract secures a very reliable source of profit, that stock becomes an instant buy.