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Bush or Kerry? A Sectoral Review, Part 1

By Sam Stovall It's early October, and the Nov. 2 Presidential election is still too close to call. With the outcome in doubt, inquiring minds may want to know: How are specific sectors and industries likely to be helped -- or hurt -- under the scenarios of President George W. Bush's reelection or a win by Democratic contender John Kerry?

With that in mind, S&P's equity analysts have helped me piece together a sector-by-sector blueprint for each outcome's potential impact. Note, however, that neither candidate has been particularly specific on individual issues. In general, Bush appears to favor a strong military, relaxed regulatory oversight, and making the recent tax cuts permanent.

Senator Kerry, on the other hand, says he would repeal many of the Bush tax cuts, particularly the capital gains and dividend-income reduction to 15%. He has also supported reducing prescription-drug prices through cost controls and reimportation. Finally, Kerry appears to be in favor of more stringent environmental regulations, thus likely leaning toward increased scrutiny of industry.

But while generalities are helpful, we would prefer to get to the specifics. So, here's the first our two-part look at what impact a GOP or Democratic win may have on each of the 10 S&P sectors -- and on the key industry groups within them. Part 2 will appear tomorrow.

Consumer Discretionary

Automobiles: A Kerry victory would more likely hurt the Big Three auto makers, in our view, and help non-U.S. brands (especially the Japanese). That's because we see the Democrats favoring changes in fuel-economy legislation. Imported autos currently offer higher fuel efficiency, on average, than American cars. An increase in fuel economy may be embraced by the Big Three, however, if the related costs were offset by more favorable health-care-related legislation.

Retail: Department stores and discounters have benefited from higher consumer spending, spurred by lower interest rates, tax cuts and refunds, as well as the economic recovery. Lower-income consumers appear to have benefited more from tax reforms, while higher-income individuals have benefited more from stock-market gains. If Kerry is elected, we believe consumers may moderate their shopping as they anticipate an increase in taxes. In addition, outsourcing may be discouraged, making apparel a bit less affordable to the masses.

Consumer Staples

Alcoholic Beverages: Even though President Bush favors corporate tax relief, we don't think this will extend to the alcohol and tobacco industries. Both candidates may look to beer, wine, and spirits producers for increased excise taxes in the future, but neither has specifically voiced an interest in doing so currently.

Tobacco: With some states in a fiscal bind, we think tobacco excise taxes will continue to be a prime target for funding regardless of who's in the White House. However, Bush is in favor of tort reform, which we believe could limit Big Tobacco's legal costs.

Tort reform is less likely to be an issue with Kerry in the White House, and he has already stated that he's in support of a buyout of tobacco growers and quota holders that now operate in a government-sponsored price-support system. Kerry hasn't indicated how he thinks the buyout should be funded, but we believe manufacturers may bear the cost. This would worry tobacco investors, even though the industry could become more competitive in the long run as a result of this buyout (since the existing price-support system increases the cost of growing and selling tobacco products).


With the U.S. dependent on fossil fuels for many years to come, it should come as no surprise that both Bush and Kerry favor alternative and renewable energy (such as solar, wind, ethanol). Each also wants to expand conservation efforts and broaden relationships with energy suppliers internationally. As for specific industries:

Drillers, exploration and production, and refining and marketing: Many see Bush as the candidate more likely to aid the traditional energy segment. The energy stocks that we think would benefit from a Bush reelection are oil and gas outfits, drilling and service companies, engineering and construction concerns, and research facilities, corn farmers, nuclear-power producers, and liquefied natural gas (LNG) businesses and tanker operators.

Bush has stated an interest in promoting domestic oil production in 1% of the Alaska National Wildlife Reserve, providing incentives to develop natural gas production from deep formations in the Gulf of Mexico's shallow waters, constructing an Alaska natural gas pipeline, building LNG terminals to meet the growing natural gas demand, and removing bureaucratic obstacles to help build new refineries. He's also expected to promote nuclear power as a viable and emissions-free energy source. We see a Kerry Administration offering fewer tax breaks to oil, gas, and coal producers.

Alternative Energy: We think the Kerry-Edwards team appears to have the edge here as they're likely to increase energy independence through conservation and promote clean, renewable fuel sources that can cut waste and limit the assets that terrorists can sabotage and foreign governments can seize. They also encourage the development of new technology and production methods to ensure that resources such as coal and natural gas are used more efficiently and cleanly. Alternative-energy producers would receive a boost from Kerry's plan to have 20% of U.S. energy derived from renewable sources by 2020.

International: We think energy outfits that trade with Latin America could face tough going under a Kerry Administration since he wishes to review NAFTA and write stricter environmental and labor rules into the Central American Free Trade Agreement. This could derail Kerry's plans to develop long-term natural gas partnerships with Mexico and hurt oil and gas producers working on deals in Latin America as well as U.S. refiners selling products to Latin America.


Asset Managers/Brokerage: These industries may be Bush beneficiaries in the unlikely event that he succeeds in privatizing some of Social Security.

Government-Sponsored Enterprises (GSEs): Calls for reform of Fannie Mae and Freddie Mac in the wake of Freddie's 2003 accounting scandal have grown louder after Fannie Mae recently became embroiled in its own accounting controversy. We think Congress will take a serious pass at the issue in 2005, after the elections. Ideas range from merely creating a stronger, better-funded regulator (supported by politicians from both sides of the aisle and, ostensibly, the GSEs themselves) to stronger proposals, which generally find support among Republicans and Federal Reserve officials, to increase capital requirements or minimize the perceived contacts between the government and the companies.

Property and Casualty Insurance: The primary election issue for this industry is tort reform. We believe that, in theory, a Republican win would be a positive for this industry since this party historically has touted the need to rein in what it believes are excessive financial awards for damages. Conversely, a Democratic win would be a negative since tort reform would not likely occur under a Kerry-Edwards Administration.

Real Estate Investment Trusts (REITs): Kerry's proposals to raise the capital-gains tax rate could hurt commercial real estate values and REIT stocks. The hike to the dividend tax would have no impact on most REIT issues. However, a Kerry victory may help health-care REITs should he propose an increase in the Medicare/Medicaid reimbursement rates.


Chemicals: The chemical industry is a large user of energy, either as feedstock or as fuel for power generation. Since Bush seems to be the more pro-energy candidate, this group could benefit from his reelection. Kerry appears to be more of an environmentalist and therefore may be more likely to renew the Superfund tax (which finances the cleanup of heavily polluted areas), the bulk of which was paid by the chemical industry.

Gold: We think a Kerry Administration would be less positive for the price of gold-mining shares. That's because his pledge to reduce the budget deficit by raising taxes would likely result in a stronger dollar and lessen inflationary concerns, thereby reducing gold's investment appeal somewhat.

Paper and Forest Products: These companies are vulnerable to asbestos litigation through their former business units. Under a Kerry Administration, we think it unlikely that he would help pass the bill to create a national trust fund to compensate asbestos-exposure victims since the current version could exclude future litigants and is thus viewed as being pro-business.

Tomorrow: The potential impact on the health-care, industrial, info tech, telecom services, and utilities sectors.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) and their proxies (the highest STARS-ranked companies in the subindustry index; tie goes to the largest market value) as of Oct. 1, 2004:






Commodity Chemicals

Lyondell Chemical




Consumer Electronics

Harman International




Diversified Metals & Mining

Peabody Energy




Fertilizers & Agricultural Chemicals

Scott's Co.




Internet Retail





Internet Software & Services





Multi-Sector Holdings

Leucadia National




Oil & Gas Exploration & Production





Oil & Gas Refining & Marketing & Transportation





Photographic Products











Wireless Telecommunication Services

Nextel Partners




Required Disclosures

As of June 30, 2004, SPIAS U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% with sell ratings.

5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company. SPIAS is affiliated with other entities, which may receive compensation for performing services for companies covered by Standard & Poor's Equity Research Services.


This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's

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