By Amey Stone The Presidential election is two-and-a-half months away and still too close to call. Placing a trade now based on the outcome of the race would be nothing short of gambling. Still, it's not too early to start thinking about how the victor will affect your stocks.
Election-watching by investors will likely pick up after the Republican National Convention, which begins Aug. 30, and then intensify after the debates start Sept. 30. The outcome of the race "is definitely something investors should be factoring into their thinking," says Michael Panzner, a trader at Rabo Securities and author of The New Laws of the Stock Market Jungle.
"Professional investors are paid to look six months out," says Greg Valliere, chief strategist at Charles Schwab's Washington Research Group. "They may already be starting to anticipate what things will look like after the election." Of course, they have no more ability to predict a winner at this point than the political pundits. Instead, they're looking at what would likely happen under both scenarios: a George W. Bush reelection or a John Kerry victory.
DOES IT MATTER? And history isn't necessarily a guide. Stocks did much better under Bill Clinton than they've done under Bush II, but this year the S&P 500-stock index has closely tracked movements of futures prices pegged to President Bush's reelection chances. When he's gaining in the polls, stocks rise, and when he's falling, so does the market.
That correlation may not hold as the election approaches, some strategists believe. That's because investors will likely get more comfortable with Kerry as they learn more about his platform. True, a Republican Congress would make it hard for Kerry to get legislation passed, says Valliere, but a President can have enormous influence nonetheless. For example, he thinks the regulatory environment under Kerry would be more adverserial.
Only certain industries would probably be affected by new regulation. "For most sectors it doesn't make much of a difference who wins," says Andy Laperriere, who manages the Washington policy research team for International Strategy & Investment (ISI). "But there are a few where it makes a big difference." Here's a breakdown of how major sectors could be affected by the election's outcome.
THE W INDEX. Health care would benefit the most from a Bush win, strategists think. For Big Pharma, four more years of Bush would likely be a big relief. Drug stocks have taken it on the chin in recent months as investors have worried about Kerry's proposals for less generous Medicare reimbursement rates for prescription drugs and easing restrictions on importing cheaper drugs from Canada. Likewise, health-care companies, especially insurers and pharmaceutical benefits managers, would likely get a bounce from a Bush victory.
Energy and defense have prospered the most under the Bush Administration. Peter Cohan, a management consultant and author of business books in Marlborough, Mass., has created an index made up of leading companies in the oil, coal, gas, and defense industries. From January, 2001, through mid-August, his W Industrial Complex (WIC) Index is up 39%, whereas the S&P 500 is down 18% and the Nasdaq is down 34% for the same period.
Policy strategists believe a Bush win would give those industries a temporary boost but that the actual impact of Administration policy on these companies' sales and earnings would be difficult to predict. For example, defense might get a psychological lift from a Bush victory, but Laperriere thinks weapons procurement is likely to go up no matter who wins. "If Kerry were to win, defense would sell off...but that would be a buying opportunity," says Laperriere.
SAFER FOR FANNIE? Panzner points out that Bush might cut overall defense spending, partly to reduce deficit spending. "The old rules about what might do in terms of defense spending may not apply," he says.
As for oil, a Bush reelection would be a net gain for most traditional energy companies since Kerry is expected to push for higher emissions standards and promote adoption of renewable energy. But strategists point out that energy stocks have climbed recently because of higher oil prices, which are out of Bush's control.
A Kerry win would have clear upside for other segments of the market. Valliere says you can count on a boost to the stocks of Fannie Mae (FNM) and Freddie Mac (FRE). Those mortgage-financing giants operate under federal charter and have faced increased scrutiny from Republicans, who might sever the government tie. "The regulatory climate [for these government-sponsored enterprises] under Kerry would be much less threatening," Valliere says.
STEM-CELL STIMULUS. Alternative energy is the other sector that would climb under President Kerry. Promoting renewable energy "is a real cornerstone of the Kerry platform," says Jack Robinson, co-manager of the Winslow Green Growth Fund (WGGFX), which owns many of the companies likely to benefit from a Kerry win. He points out that the senator would promote things like tax credits for solar and wind power, and tighten fuel-efficiency standards.
The only problem with buying alternative-energy companies is that many of them are small and speculative, says Dan McNeela, who covers energy-sector funds for Morningstar. They would be risky bets even if Kerry were to win. Robinson's holdings in this area include Quantum Tech (QTWW), a fuel-cell play; Vestas Wind Power (VEST), which makes wind turbines; and FuelTech (FTEK), which makes products that allow more efficient coal burning.
Some investors believe Kerry would boost biotech as well some other research-intensive, venture-capital-funded industries, like nanotech. For example, opening up stem-cell research, which has been severely curtailed in the U.S. by the Bush-imposed funding restrictions, would be an important stimulus to the U.S. biotech industry, says Robinson. His fund owns Thermogenesis (KOOL), which makes equipment used to harvest components of blood, including stem cells.
WHAT ABOUT RALPH? Robinson says he also believes companies involved in "healthier living" would benefit from a Kerry Administration trying to reduce the nation's health-care costs. Whole Foods (WFMI), United Natural Foods (UNFI), and Chiquita bananas (CQE) are his plays on that theme.
Clearly, Robinson and his fund are hoping for a Kerry win. "The stock market did well under Bill Clinton, and I feel a greater openness by the Democratic Party to new ideas and new technology," says Robinson. Other investors believe Kerry would be bad for growth because of the likelihood of higher taxes and more regulation. "We have grave concerns about the negative impact on the economy and the markets of a Kerry victory," wrote Donald Luskin, chief investment officer at research firm TrendMacrolytics, on Aug. 13.
Then there's third-party candidate Ralph Nader. Even though investors don't know whether to bet on Bush or Kerry at this point, at least they don't have to wonder what the market would do under President Nader. Stone is a senior writer for BusinessWeek Online in New York