03/02/16   Political Risk

Editor’s Corner

Ron Rowland

Political risk is always present in the markets, although it is not always visible. Unlike the objective calculations behind other risk measures such as standard deviation, maximum drawdown, and beta, political risk is difficult to quantify. This is a presidential election year, and therefore political risk will be extremely evident.

Before too long, if it hasn’t already started, various pundits will be offering their political portfolio picks. They will conjure up a list of stocks and sectors poised to benefit, along with stocks and sectors to avoid, if a Democrat is elected. Picks and pans for a Republican victory will also be prepared. Some analysts will go even further and have portfolio recommendations based on specific candidates.

The enactment and implementation of the Affordable Care Act (“Obamacare”) was wrought with political risk as investors tried to sort the winners from the losers at various stages of the process. Oil drilling, pipelines, and more recently fracking, seem to continually be on politician’s radar, both nationally and locally. Banks have been receiving plenty of political scrutiny since the 2007–9 financial crisis. Various import and export industries are subject to the whims of the latest trade deals and associated duties. No industry is immune from political risk—it’s just a matter of degree.

Drug makers find themselves embroiled in political risk more often than the average sector or industry. In one candidate’s eyes, it is nothing short of an evil industry. In February 1993, biotechnology stocks, as measured by the Fidelity Select Biotechnology (FBIOX) mutual fund, cratered 17% in one week. This plunge of 23 years ago was attributed to remarks by then First Lady Hillary Clinton and her HillaryCare proposal. In March 2000, the Clinton Administration placed human genome research data in the public domain, and biotech stocks crashed. Last September, biotech stocks plunged 8% in four days when Hillary Clinton decided to target drug prescription prices as part of her presidential campaign. This week, she got more specific, vowing to “go after” Valeant Pharmaceuticals (VRX) for predatory pricing, which contributed to its 18% plunge on Monday.

This may be the first time a presidential candidate has attacked a specific company but certainly not the first time an industry has been targeted. Assaults are not limited to just the health-care industry and certainly not to just one political party. Coal, entertainment, big oil, tobacco, and a host of others have all had an opportunity to be in the crosshairs of various candidates. It’s a fact of life that investors must deal with every year, and especially during election years.

Investor Heat Map:3/2/16


For the first time in ten weeks, the sector rankings are skewed to the positive side. Today, we have a new leader. Telecom has taken the helm and pushed Utilities a notch lower, ending its seven-week reign. Telecom has resided in the top-half of the rankings since the last week of December, boosting its reputation as a defensive sector during the market decline of January and February. This week, it broke out to a new 15-year high and is displaying true leadership qualities. Utilities was the only sector losing momentum this week, as investors rotated to more aggressive market segments. Consumer Staples and Industrials solidified their third- and fourth-ranked positions. Three sectors made the transition from red to green, as Real Estate, Materials, and Consumer Discretionary put the number of sectors displaying positive momentum at seven. Technology is close to making the jump to green but remains slightly negative for now. Health Care, Financials, and Energy continue to lag, with Energy moving back down to last place.


The quantity of styles with positive momentum jumped from zero to six this week, but one look at the chart will tell you they all lack conviction. It is a technical victory, yet a hollow one. Of the six, none has a momentum reading higher than two, and half are barely on the plus side of zero. Mega-Cap remains at the top, a position it has held for 23 straight weeks, exhibiting persistence in its relative strength. However, its margin has now all but disappeared, and it may be forced to relinquish its crown next week. Mega-Cap’s challengers consist of the six categories that constitute the Large-Cap and Mid-Cap segments. They are in a near six-way tie for second place, and any of them could easily supplant Mega-Cap for the style leadership position. The three Small-Cap categories posted the best improvements in momentum scores for the week, but they have further to go before joining the leaders. Micro-Cap is on the bottom.


The global rankings have been solid red for the past eight weeks. Today, Canada and Latin America have flipped to green. Canada completed its climb from the bottom to the top three weeks ago, and it now adds positive momentum to its list of attributes. Latin America has followed the ascension of Canada and this week moves ahead of Pacific ex-Japan to secure second place. Pacific ex-Japan actually fell two places, which also allowed the U.S. to move a notch higher. The U.S. is on the negative side of zero and is attempting to become the third global category to move into the green. Pacific ex-Japan, World Equity, and Emerging Markets make up the middle tier and are within range of being able to post positive momentum scores by our next update. Among the laggards, the U.K. moved ahead of EAFE, and Japan climbed above the Eurozone. China remains on the bottom for the fifth week.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“If somebody wants to build a coal-fired power plant, they can. It’s just that it will bankrupt them. Under my plan … electricity rates would necessarily skyrocket.”

-Barack Obama during his successful 2008 presidential campaign


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