NEW YORK With polls tightening in the battleground states that will likely decide the November 6 presidential election, investors are finding it increasingly difficult to position their portfolios.
"Even if you did have a belief about a relationship between one political party and the market, how would you bet right now?" said Lawrence Creatura, a portfolio manager of the $310 million Federated Clover Small Value fund. "If you look at the roulette wheel, half of the slots are red and half of the slots are black."
Typically, a rising stock market like this year's 12.4 percent gain in the Standard & Poor's 500 would point to a victory by the incumbent, said Sam Stovall, chief equity strategist at S&P's Capital IQ. But improving stock prices may not be enough this year to overshadow an unemployment rate of 7.8 percent and an economy that is growing at a pace of just 2 percent per year.
Rather than making an early bet on the outcome of the election, many investors and strategists are instead preparing for several possibilities. Here are some of their strategies.
While fundamentals like corporate earnings and growth will remain paramount for investors, the policies of the next president will likely have some effect on companies ranging from defense contractors to small-capitalization stocks, analysts said.
The stock market overall will react most favorably to a victory by Republican challenger Mitt Romney because his preferences for deregulation and tax cuts are the most friendly for businesses and the wealthy, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds.
The worst possible outcome for stocks would be if Democrats hold on to the Senate and the presidency while the Republicans maintain their advantage in the House, he said.
"Then we'll get two more years of the status quo and nothing will get done," he said, noting that he would expect the stock market to stay within its current range until the 2014 elections.
A Romney victory would help coal producers, railroads, large banks and defense companies, said Jonathan Golub, chief U.S. equity strategist at UBS.
Companies like American International Group Inc, private equity firm Carlyle Group LP and Goldman Sachs Group would likely benefit from a Republican presidential win because the financial reforms of the Dodd-Frank Act would not be implemented as strictly and the possibility of additional taxes would ease, noted Golub.
Giant technology companies like Cisco Systems Inc and Microsoft Corp, which each have more than $40 billion in cash overseas, would also gain from a Romney victory because he would likely end or reduce the capital repatriation tax, Golub said.
An Obama victory, meanwhile, would be most beneficial to healthcare, green energy and infrastructure companies, Golub said. First Solar Inc, for instance, gets 60 percent of its business funded by Department of Energy loan guarantees that would be at risk with a Romney victory, he noted. Design services company Aecom Technology Group, meanwhile, gets roughly 20 percent of its revenues from government spending on infrastructure projects like roads and bridges.
Small cap stocks would gain from a second Obama term because accommodative lending terms and low interest rates would likely remain in place, noted Joe Heider, a Cleveland-based financial advisor at Rehmann.
An Obama victory could also lead to a selloff in dividend-paying companies and stocks with large share price gains near the end of the calendar year as investors prepare for preferential tax treatments of dividends and capital gains to end, he said.
LOOKING AT CONGRESS
The makeup of Congress could be more important for investors than the outcome of the presidential race, said Aaron Gurwitz, chief investment officer at Barclays.
Gurwitz is especially interested to see the outcome of the Indiana Senate race, as well as who wins House races in Texas's 8th congressional district, Minnesota's 8th, Illinois's 10th and 11th, New Hampshire's 1st, and Florida's 18th. Each of these races feature Republicans who have pledged to not compromise on matters like raising the debt ceiling or raising taxes.
With neither party expected to have significant majorities in either branch of Congress, smaller coalitions will have to form across party lines to make any legislative progress, he said.
A victory by Republicans in these races could signal that political gridlock could continue to harm the economy, said Gurwitz. That would benefit defensive companies and other conservative investments, he said.
A victory by Democrats in these races, meanwhile, could convince the remaining Republicans in Congress that voters increasingly prefer candidates who are willing to compromise across party lines. Investors should take that as a signal to move into riskier assets because there will be a greater likelihood that progress will be made on issues like the deficit, he noted.
(Reporting By David Randall; Editing by Chelsea Emery and Kenneth Barry)