Would investing in companies that have close relationships with the Obama administration be a good tactic, or a money loser?
That's the question I tried to answer with the Crony Capitalist Index, first calculated back in February. It was a test of whether companies that cozy up to the White House actually create value for their shareholders, perhaps by using the power of the government to their advantage, or whether they destroy value, perhaps seeking the president's favor only because they've exhausted the other methods of successfully competing in the marketplace.
On the first calculation, there did seem to be some outperformance by companies whose executives were invited to state dinners at the White House or named to certain presidential advisory boards. The midyear point seemed a good time to review the data again, adding some newly created presidential panels and incorporating the companies whose executives were guests at President Obama's fourth state dinner, for the German chancellor, Angela Merkel, on June 7.
The results? An investment in the companies whose executives President Obama appointed to the President's Economic Advisory Board back on February 6, 2009 — UBS, GE, Caterpillar and Oracle — would have gained 151%, far outperforming the broader stock market during this period, which rose 52%, as measured by the S&P 500 Index.
Investing in the companies whose executives attended President Obama's first state dinner, in honor of Prime Minister Singh of India, on November 24, 2009, would have also outperformed the market by a large margin. Shares in those firms — GE, PepsiCo, Caterpillar, Honeywell, and Ethan Allen — are up about 54% since then, versus 19% for the S&P 500.
But trying to profit in the stock market from President Obama's choices would have worked out less well starting in 2010 and moving into 2011. The companies represented at Mr. Obama's May 19, 2010, state dinner for the president of Mexico —Morgan Stanley, Bank of America, and UBS — are down about 8% since then, over a period in which the S&P 500 gained about 18%. Companies represented on the President's Export Council, named in July 2010, about matched the overall market, as did the companies on the President's Council on Jobs and Competitiveness, whose members were mostly announced in February 2011.
The companies represented at the state dinner for President Hu of China are down about 3% since the January 2011 dinner, against a gain of about 3% for the S&P 500. IBM, Duke Energy, and Choice Hotels, whose executives attended the June 7, 2011, state dinner for Chancellor Merkel, have outperformed the broader market by about one percentage point since the dinner.
I constructed these comparisons using Yahoo! Finance historical price data that adjust for splits and dividends. The results aren't weighted according to the overall capitalization of the companies, so they are skewed somewhat by what the starting per-share prices happen to be.
It's hard to say whether the outperformance in some cases is just randomness, or if there are other factors. Stronger companies may have a better chance of getting chosen by the president. It could be that the executives are using information or access they gain as a result of their White House ties to advance their companies' interests. It could be that the mere appearance of government access boosts the companies' stock.
What I find most intriguing in this round of results is that the value of closeness to the White House seems to have subsided in 2010 and 2011 as compared with 2009. Perhaps the election of a Republican House of Representatives has reduced the market value of an executive's relationship with President Obama. Or perhaps it's time to devise a Crony Capitalist Index that measures a company's relations with Speaker Boehner.