Here's one way to figure out how the 2008 election will affect the stock market: Look at the Presidential candidates' platforms and speeches, and decide whether they would hurt or help particular industries.
Stock strategists and analysts try to carefully calculate the possibilities. For example, Illinois Senator and Democratic hopeful Barack Obama's ambitious proposal to reform health care is widely expected to squeeze profit margins in the health-care industry, particularly for big insurers such as UnitedHealth Group (UNH) and Humana (HUM). His environmental proposals may help alternative energy companies, while his plans to spend more on infrastructure and universal Internet access could help construction firms and technology companies.
By contrast, Arizona Senator and Republican hopeful John McCain's health-care plans are more modest. He generally favors less regulation, which may help the beleaguered financial sector avoid new strict rules, and lower taxes on the wealthy, which may help upscale retailers and investment firms.
The policy-focused approach has its merits. Major policy changes can turn the stock market on a dime. In the eight months after President Bill Clinton's election in 1992, the S&P 500 Healthcare index dropped 25%, Credit Suisse (CS) analyst Kristen Stewart noted recently. The reason? At the time, First Lady Hillary Clinton was developing a national health-care reform proposal. Stocks in the sector rebounded when it was clear the plan wouldn't be enacted.
However, there's a problem with stock-picking based on a candidate's speeches or policy proposals. "Investors interpreting each campaign proposal as definite will be mistaken come '09," Daniel Clifton of Strategas Research Partners wrote recently.
Disappearing Gridlock?It's easy to say things on the campaign trail, but it's hard to get those ideas enacted as law. Judging by history, many campaign proposals might never be mentioned again when a politician takes office.
Investors do "tend to be skeptical about rhetoric," says Brad Sorensen, senior sector analyst at the Schwab Center for Investment Research (SCHW). It's not rhetoric, but the threat of real policy changes, that riles investors, who tend to prefer stability and fear new rules and regulations. "The market tends to like gridlock," Sorensen says.
However, the market doesn't always get what it wants. And, strategists who track Washington closely say the biggest change to come out of the 2008 election may be a big reduction in gridlock.
Whether McCain or Obama wins, there is a "near certainty of dramatic gains for Democrats in the House and Senate," says Gregory Valliere, chief political strategist at Stanford Financial Group. Frank Kelly, Deutsche Bank's (DB) North American head of government affairs, says the market isn't paying enough attention to congressional races, which he calls "the real election." He says: "We're looking at the potential for gridlock disappearing."
Aisle-CrossingDemocrats, now with a bare majority of the 100-member Senate, could win five or more seats, getting them close to the 60 votes needed to push through bills despite filibusters. "On health care, climate change, and taxes, there will be moderate Republicans who will cross the aisle," Kelly says.
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