What the Election Means for Investors


Here’s a fascinating compare and contrast analysis, sector by sector, of the impact of each candidate in the election from last week’s WSJ (You may have overlooked it, buried as it was in the Personal section). The Jornal observed: “The economy is at center stage ahead of the Nov. 2 presidential election. Job creation has picked up this year, but employers remain cautious about adding substantially to their payrolls, and employment levels remain below where they were four years ago.”

Thats the gross overview. Let’s get down to the nitty-gritty details:

With Election Day less than a month away, Wall Street has already staked out its own winners and losers.

In recent weeks, research analysts at the major brokerage houses have been churning out reports identifying what a Bush or Kerry administration would mean for investment strategies — and which sectors of the economy would undergo the biggest changes if there were a change in leadership. A recent report by equity analysts at Credit Suisse First Boston, for example, notes that with the start of the presidential debates, “we thought this was a good time to revisit the candidates’ health-care platforms and their significance for managed-care stocks.”

Lehman Brothers and investment-strategy firm ISI Group have created “presidential indexes.” The idea is to track the performance of stocks that are likely to be most affected under each administration. ISI’s “Bush Index” holds pharmaceuticals and energy stocks, among others, reflecting the belief those sectors would fare well under a second term for the president. ISI’s “Kerry Index” has short positions in health maintenance organizations and utilities. The indexes act as a proxy for what Wall Street is thinking will happen Nov. 2.”

I continue to hold the position that while the President matters less to the macro economy and the overall market than most people believe, they do have a large impact, on individual sectors. Thus, any change at the top will be significant (at least somewhat) to specific industries. Since its doubtful the House of Representatives will change — that makes the implications of a change in presidential leadership somewhat less significant than it might be otherwise.

Here is a breakdown, sector by sector:

Here is the WSJ’s take on which sectors win under both Bush and Kerry
(for a somewhat different view, see Businessweek’s Bush or Kerry? A Sectoral Review):

Bonds vs. Stocks. The general consensus is that a Kerry win could give a boost to the bond markets — and to tax-advantaged municipal bonds in particular — while a Bush victory would favor stocks. That is because bigger deficits could put pressure on interest rates, hurting bond prices. Bond prices typically fall under Democratic administrations on the belief that the party tends to increase spending, but many analysts expect Sen. Kerry to cut budget deficits by raising taxes for high-income individuals.

Mr. Bush’s emphasis on low taxes for both dividends and capital gains would continue to make investing in equities, especially dividend-paying stocks, attractive. But some analysts say the markets have largely priced in a Bush victory, so if he wins a second term, any upside in the broader stock market could be minimal.

Energy/Automobiles. Energy stocks such as Nabors Industries Ltd., Southern Co. and BP PLC could be helped if President Bush wins, since he is more likely to push for efforts to increase domestic supply through oil-drilling projects in Alaska. Alternative-energy producers such as Ballard Power Systems Inc. and Tetra Tech Inc. are well-positioned under Mr. Kerry.

Mr. Kerry is also expected to enact tougher environmental standards and regulations, which will increase costs in the basic-materials and utilities sectors, says Jeff Kleintop, chief investment strategist for PNC Financial Services Group. Auto makers could face higher costs in a Kerry administration given potentially higher fuel economy standards, while higher taxes could put a dent in vehicle purchases, particularly luxury models.

A Kerry-appointed head of the Environmental Protection Agency would also likely tighten emission standards for coal companies, says Greg Valliere, chief political analyst in Charles Schwab’s Washington research group. ISI, for instance, has short positions in companies such Massey Energy Co. in its Kerry index.

Financials. President Bush’s proposal to create more tax-advantaged investment accounts, if enacted, would bring a stream of new customers to banks, brokers and asset managers. But the vehicles would create stiff competition for tax-deferred annuity products, potentially damping sales for life insurers such as National Financial Services Inc. and Lincoln National Corp., according to ISI.

Property and casualty insurers would probably fare better under President Bush, since the Republican administration has favored tort reform that would place caps on class-action lawsuits and medical malpractice suits. Student lenders like Sallie Mae could also take a hit in a Kerry administration since he has proposed reducing subsidies for student loans.

Health Care/Pharmaceuticals. Managed care would likely fare better under a continuation of Mr. Bush’s Medicare legislation, which generally expands the role of the private sector. So would pharmaceuticals. The president’s Medicare prescription-drug benefit gives drug companies more pricing power than a Kerry administration would. Sen. Kerry’s efforts to re-import lower-cost drugs from other countries, such as Canada, could hurt this sector.

The Bush administration is also providing subsidies to companies like Humana Inc. and PacifiCare Health Systems Inc. as a way to attract private insurers to the Medicare market. Mr. Bush’s push to expand sales of health-savings accounts could help companies like Aetna Inc.

Sen. Kerry’s proposals to increase the number of the insured would reduce bad-debt levels at hospitals, helping companies like HCA Inc. and Tenet Healthcare Corp. Stronger balance sheets should, in turn, lift shares of medical-device companies, since hospitals wouldn’t be forced to cut back on spending, according to Prudential Equity Group.

Pharmacy-benefit managers — such as Express Scripts Inc., Medco Health Solutions Inc. and Caremark Rx Inc. — would also come under pressure since they would be required to disclose their pricing arrangements under Mr. Kerry, says Grant Cowley of Schroder Investment Management. More pharmaceutical regulation could also benefit generic drug producers, Mr. Cowley says.

Housing/Home builders. Given Democrats’ traditional push to expand affordable housing, home builders such as Pulte Homes Inc. and KB Home are likely to get more federal aid under a Kerry administration. The current Treasury’s push for tougher regulation on government-sponsored mortgage giants Fannie Mae and Freddie Mac, meanwhile, is likely to ease under Mr. Kerry.

Media/Publishing. President Bush, according to Wall Street, would be better for newspapers and TV stations. A Kerry-appointed Federal Communications Commission chairman could take a harder stance against media consolidation, hurting companies such as Belo Corp. and Tribune Co. Still, a Kerry administration could expand spending on education, which would help publishers of textbooks and other educational materials, says David Darst, chief investment strategist for Morgan Stanley’s Individual Investor Group. Companies that could benefit include Scholastic Corp. and McGraw-Hill Companies Inc.

Restaurants/Retailers. Sen. Kerry’s proposal to increase the minimum wage would also raise costs for the restaurant industry, especially in the fast-food sector, says Bob Doll, chief investment officer of Merrill Lynch Investment Managers. Meanwhile, sales of upscale retailers such as Neiman Marcus Group Inc., Saks Inc. and Tiffany & Co. could slow if the wealthy are hit with higher taxes, while mass-market retailers like Kohl’s Corp. would benefit as Mr. Kerry pushes for tax relief for the middle class.

More from the WSJ:

“Wall Street has already staked out positions on which sectors stand to prosper under each candidate. (The assessment below reflects the combined thinking of many analysts).

HMOs/drug makers/pharmacy benefit managers: Bush’s Medicare plan favors more private-sector health-care delivery, which would give companies more pricing power. Bush’s plans to expand health-savings accounts would also benefit insurers.

Hospitals/medical devices: Kerry’s plan to increase the number of insured would reduce hospitals’ debt problems. That in turn could mean more spending on medical devices.

Asset managers: Continuation of lower tax rates on dividends and capital gains would help firms serving the equity markets. Proposals to create new tax-advantaged investment accounts would help financial-services firms.

Medicaid HMOs: Expanded role of Medicaid could benefit HMOs active in that program.

Energy/oil/coal: Exploration and drilling projects could be more easily approved. Companies may also benefit from less environmental regulation.

Freddie Mac/Fannie Mae: A Kerry administration is likely to ease up on current scrutiny of these mortgage giants.

Property/casualty insurers: Tort reform would limit payouts from class-action lawsuits and medical-malpractice awards.

Alternative energy: Kerry is likely to support alternative-energy sources, which could boost investment in fuel cells and wind energy.

Dividend-paying stocks: Continuation of lower tax rates on dividends would boost stocks in sectors such as utilities.

Home builders: Democrats have traditionally been more friendly to this group, given their push to increase the supply of affordable owner-occupied housing.

Defense: Although both candidates are likely to maintain spending levels, a Bush victory is perceived as more positive for the sector.

Life insurers: Unlike Bush, Kerry has no plans to expand tax-advantaged savings accounts. That would help insurers’ annuities business.

Bonds/municipal bonds: A Kerry repeal of tax breaks on dividends and capital gains for high-income families would make tax-advantaged municipal bonds more attractive.”

What the Election Means for Investors
Analysts Crank Out Reports on How Stocks, Bonds Would Fare Under Bush vs. Kerry
Jane J. Kim
Wall Street Journal, October 7, 2004; Page D1

See also Businessweek:
Bush or Kerry? A Sectoral Review, Part 1

Bush or Kerry? A Sectoral Review, Part 2

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