What would President John F. Kerry mean for the stock market? Wall Street would just as soon not find out. The Massachusetts senator has some allies among Democrats in Manhattan's money houses. But most of the financial industry is throwing its muscle, and money, behind President George W. Bush. Seven financial firms, led by Merrill Lynch & Co., are among the 10 companies whose executives have ponied up the most campaign cash for him.
In business terms, however, a Kerry win shouldn't frighten the Street or investors. After all, stocks have historically fared much better under Democratic Presidents than Republicans. Since 1929, stocks have returned an average of 9.5% a year, after inflation, with a Democrat in the White House, vs. just 2.3% under Republicans, according to market data provider Ibbotson Associates Inc. in Chicago.
More important, even if Kerry wins handily this year, he's unlikely to bring Capitol Hill under his party's sway. While Democrats have a shot at winning a narrow majority in the Senate, political analysts say the House is all but certain to remain in Republican hands.
So a Kerry win would likely mean a return to divided government -- and that often suits investors just fine. With the economy rolling along, President Kerry wouldn't be forced to make any bold policy moves. And with a GOP House slipping back into the spoiler role it played during the Clinton Administration, the odds are the House would stymie the centerpiece of Kerry's economic platform: a rollback of Bush's tax cuts for families in the top tax bracket to pay for a vast new health-care plan. Under that scenario, investors could look forward to stability in economic policy and the markets. "Gridlock can be good," says Tom Gallagher, a Washington-based political economist for economic researchers ISI Group Inc.
Instead, Kerry would have his greatest impact through the regulators he appoints for specific industries -- just as President Bill Clinton did. Big Pharma, for example, would have to worry that a Kerry Administration would give the green light for reimporting the drugs that it sells for lower prices in Canada and elsewhere, undercutting U.S. profits. And while the Bush Medicare prescription plan prohibits the government from negotiating drug discounts, Kerry's appointees could pressure drugmakers and pharmacy benefits managers to ratchet down prices. Similarly, auto makers could face tougher emissions standards that would make cars more expensive. Other industries could be Kerry winners: Alternative energy producers would stand a better chance of getting federal help. And housing giants Fannie Mae (FNM) and Freddie Mac (FRE) -- whose affordable-housing mission has long made them favorites with Democrats -- could hope that the Bush Treasury's push for tougher oversight would fizzle.
Kerry's policy mavens have to keep an eye on the outcome of congressional races. Democrats are gaining in Senate races, and a big turnout for Kerry would probably give them the lift to regain control. But the House is out of reach in anything short of a Democratic landslide. With no real competition for roughly 400 of the 435 House seats, "Democrats would need a huge victory in the three dozen contested seats" to overcome today's 21-seat GOP margin, says Charles E. Cook Jr., editor of The Cook Political Report, a nonpartisan newsletter.
Gridlock on the Hill could produce larger budget deficits and a bumpy ride for bonds. Kerry has blasted Bush for creating runaway deficits. But he isn't likely to persuade the House GOP to accept his plan to restore higher rates on wages, dividends, and capital gains for families earning $200,000 or more. After all, it has spent most of this year trying to make Bush's cuts -- which expire in 2008 -- permanent. But even without added revenue, Kerry will face enormous pressure to spend more, particularly on health. "The story that deficits drop and bonds rise under Kerry just doesn't hold up," says Gregory R. Valliere, chief strategist of Charles Schwab & Co.'s (SCH) Schwab Washington Research Group.
Kerry could also upset markets with his trade policy. While he has voted for free trade in the Senate, on the stump Kerry has veered left toward "fair trade" protectionism. He has vowed to review NAFTA and write stricter environmental and labor rules into the Central American Free Trade Agreement. Companies that sell to Latin America, such as heavy-equipment makers, or invest in factories there, such as apparel makers, could face a rough patch if Kerry does so.
A Democratic win could have a mixed impact on some industries. Health-maintenance organizations might face tighter reimbursement limits from Medicare and Medicaid. But Kerry's plan for the government to insure high-cost catastrophic medical cases could be a boost for hospitals, which would have less trouble collecting big bills. Big aerospace companies could lose out if, as expected, Kerry cuts weapons systems. But contractors that have emphasized homeland security could fare even better than now.
A Bush loss would be a mixed bag for finance. Insurers will breathe a sigh of relief if Bush's plans to expand tax-free savings accounts -- low-cost competition for pricey annuities -- fade away. But Bush's second-term plan to reform Social Security by substituting private accounts for part of the government retirement plan would disappear, frustrating banks' and brokers' hopes for a rich stream of funds.
TOO CLOSE TO CALL
Wall Streeters are already trying to capitalize on policy differences between Bush and Kerry. Lehman Brothers (LEH) analysts constructed a "Bush portfolio" larded with stocks of oil drillers, auto makers, mutual-fund advisers, and high-priced retailers. The alternative "Kerry portfolio" was heavy in homebuilders, life insurers, Fannie and Freddie, and midrange retailers. The two accounts faithfully mirrored Bush's springtime slide, with his portfolio lagging Kerry's by 8.7% since late April. Meanwhile, the President's predicted margin of victory shrank from 6% to 1% on the University of Iowa's Iowa Electronic Markets. "If the election were today, Kerry would win," says Cook. But Bush's recent progress toward the exits in Iraq, coupled with continued strong job gains at home, are lifting the incumbent's prospects. "Only a fool would bet on this election," says Larry Sabato, director of the University of Virginia's Center for Politics.
With the vote too close to call, investors might want to stick to fine-tuning their holdings. They should keep in mind that political plays are always risky: Who would have predicted that Ronald Reagan would become a budget-buster -- or Bill Clinton the bond market's best friend? With candidates, as with investments, past performance is no guarantee of future returns.
By Mike McNamee