These are the shares that could return 11% in 3 months if Joe Biden and the Democrats take the White House at the upcoming US election.
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Next week’s United States presidential election is fascinating for many reasons.
It’s a test of whether the world’s only democratic superpower will re-elect a man the rest of the world cannot believe is a head of state.
It’s a national poll in the midst of the COVID-19 pandemic that’s still killing thousands each day in the US.
And all this during an economic downturn unlike anything witnessed since the Great Depression, triggered by a true ‘Black Swan’ event.
But one Australian expert has added a wrinkle for share market investors. There is a category of shares that historically go gangbusters after the first 100 days of a new president.
A whopping 10.9% rise in just 3 months, no less.
“While finance experts may not predict the winning party, we may predict which stocks will win during the first 100 days following inauguration of a new president,” said RMIT senior lecturer in investor behaviour, Angel Zhong.
“During this time, generally known as the honeymoon period, value stocks and stocks with a large amount of investment generate higher returns.”
Why will value stocks do well after the ‘honeymoon’ period?
The theory is that value and large cap shares thrive in certainty and stability.
And that’s exactly the opposite of the honeymoon period — the first 100 days — of a new president.
A new administration will push through a high number of legislative changes during that period to set the tone for the next 4 years, according to Zhong.
“The achievements during this first 100-day period represents a yardstick of the success of a new president,” she said.
“Incoming US administrations have higher legislative success rates during their first 100 days in inaugural years.”
This upheaval will mean value stocks will become under-appreciated while growth companies are better placed to adjust.
“Value firms tend to be mature and have a lot of fixed assets in place, thus being inflexible to adapt to uncertainty,” she said.
“Growth firms tend to be tech companies, for example the famous FAANG stocks in the US and WAAAX firms in Australia. They tend to have a larger proportion of intangible assets, thus being able to swiftly downsize in uncertainty.”
But when the 100-day period ends, relative stability and certainty will return. Agenda-setting legislative changes will have come and gone, and the market will have a better idea about how the new president will run the nation.
And that’s when value stocks will shine.
So which shares should I be considering if Joe Biden wins?
RMIT, University of Western Australia, Monash University and University of Queensland researched ‘honeymoon period’ share prices from 1932 to 2016.
The study found startling gains for those who stick to a particular buying strategy.
“If there is a new US president, it will be a profitable trading strategy to buy value stocks and short sell growth stocks before inauguration and hold this position until the end of the 100-day period when political uncertainty resolves,” Zhong said.
“The value strategy generates 3.51% per month during the presidential honeymoon period, which is in stark contrast with only 0.27% per month at other times.”
A 3.51% monthly return equates to a 10.9% gain over the 3 months of the honeymoon period.
Zhong told The Motley Fool that buying as early as possible would reap the best potential gains using this strategy.
“Value stocks that are less flexible to adapt to changes could be cheaper at the start of the period,” she told The Motley Fool.
“But their returns gradually improve as policy changes are enacted and uncertainty is resolved.”
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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