Trading the Obama Transition

We are all hard-wired to react with suspicion whenever we hear the statement, "This time is different." However, sometimes the statement is true.

The 2008 election was unprecedented in many ways, including its unusual effect on stocks. The economic crisis overwhelmed the normal attention to specific stocks and sectors. The boost to a sector from one candidate's victory was overwhelmed by massive volatility from the economic crisis. There was no way to win from an early investment in "Obama stocks" since everything was going lower -- much lower.

In anticipation of the election, I developed a research project to analyze the various candidates and the stocks that would benefit from different outcomes. I fully expected specific stocks -- and the overall market -- to respond in traditional fashion, which proved to be incorrect.

Many of my astute colleagues at RealMoney suggested before the election that there was an Obama discount in the market based on expectations of market-unfriendly moves on tax policy, economics and trade. As the story played out, we have seen something quite different. After the election, the market seemed hungry for the promised Obama changes, a sentiment reflected in the high approval ratings (67% positive, 16% negative) for the Obama transition.

The trading pattern has been very strange. Specific stocks were ignored for weeks, even as the Obama victory became a strong probability. In the days after the election, there was a focus on anything related to policies that the president-elect had mentioned during the campaign. We got an Obama pop -- so much for the efficient market hypothesis since this was hardly new information. The reaction was too aggressive and too early, given the circumstances.

Investors and traders alike wanted to know whether the new president would end the Bush tax cuts and embark on major new spending proposals. At the risk of oversimplifying, the question was whether we would get the Obama message from the primary campaign or the message from the general election campaign.

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At the time of publication, Miller was long KOL, although positions may change at any time. Jeffrey Miller is president and CEO of NewArc Investments, a registered investment adviser, and Capital Markets Research.

Miller writes about the market, interpreting data, and finding the right expert at his blog, "A Dash of Insight. He is writing about the 2008 presidential campaign and the implications for individual stocks and the market at Election Stocks. His investment company, with programs for both individual and institutional investors, is NewArc Investments.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Miller appreciates your feedback; click here to send him an email.