Financial experts caution
against making investment
bets on elections
NEW YORK » With the race for the White House in a dead heat, many on Wall Street are handicapping the outcome in the hopes of reaping big profits if they correctly guess the winner. But while it's fine for professional investors to bet on how various sectors will perform if Sen. John Kerry defeats President Bush or vice versa, financial planners warn this is a dangerous game for the rest of us to play.
The best news for all investors, analysts say, is that regardless of the outcome, or how long it takes to determine it, there's likely to be gridlock in Washington -- a good thing for the market, historically. The Republican majority in the House is secure, but the Senate is likely to remain narrowly divided, which means neither candidate would have the 60 votes necessary for a true mandate.
"Given the closely divided Senate, there's unlikely to be sweeping legislative changes. In this race, it really comes down to regulation," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia. "The president, while unable to pass new laws, will be able to appoint new heads of the key regulatory agencies."
If Kerry claims victory, he'll usher in new chiefs at the Food and Drug Administration, the Federal Trade Commission, the Federal Communications Commission and the Environmental Protection Agency, among others. Changes in policies at those agencies could have a significant impact on the bottom lines of the companies they regulate.
As a result, institutional investors such as hedge funds are looking for sector plays. The Kerry campaign has indicated it would move swiftly to allow the reimportation of drugs from abroad, which could hurt the pharmaceutical industry. Kerry has suggested he'd look for ways to lower the nation's dependence on fossil fuels, which could benefit alternative energy companies. There could be a negative financial impact for other companies regulated by the EPA, such as coal and coal-fired utilities, if Kerry wins and tightens emissions standards. Antitrust policy could become more vigorous under Kerry, which might curb the trend of media consolidation.
A second Bush term would likely be good news for defense contractors, which might suffer setbacks under Kerry; he has indicated a preference for diplomatic solutions and sharing the military burden in Iraq with allies. There's also a widely held-belief that another four years under Bush would benefit the financial services sector, because of the president's efforts to privatize government programs like Social Security -- though few analysts believe Congress would approve such a change.
But with multiple pressures looming over stocks, including geopolitical instability, hefty oil prices and rising interest rates, the market has had a hard time finding a direction lately, making it difficult even for professional managers to beat their benchmarks. Rather than trying to prognosticate a presidential race in an already uncertain climate, financial planners say small investors with long-term goals should focus on developing a smart asset allocation strategy and sticking with it, regardless of who occupies the White House.
"There isn't enough information to arbitrage the outcome of the election, the information we have is imperfect, and if the market can't find a direction, why would an individual possibly imagine they could ferret that out?" said Paula Chauncey, a managing partner with Boston-based wealth manager Etre LLC. "Positioning your portfolio based on a candidate's promises down the pike, about what's going to happen when he gets in ... isn't smart. It's a waste of time."
Part of the reason the market seems to favor the president, or any incumbent for that matter, is because the prospect of a new administration is just unnerving. Using data going back to 1904, the Hirsch Organization Inc. found stocks tend to bounce higher when a sitting president is re-elected, with the Dow Jones industrials gaining an average 1.7 percent from Election Day to the end of November.
Conversely, the Dow has dropped an average 1.3 percent from Election Day to the end of November when a sitting president loses his bid for a second term. When the loser is a Republican, the initial declines are even steeper, though they tend to flatten out toward the end of the year. In general, however, experts say presidential politics has very limited impact on stock performance, and investors may be facing a difficult period regardless of who wins. In any presidential term, the first years are generally the most challenging, bringing the most wars, recessions and down markets, said Jeffrey Hirsch, president of the Hirsch Organization and editor of the Stock Trader's Almanac.
"It's not so much who the president is, or even what party is in office, but that the post-election year is a time when the piper gets paid," Hirsch said. "Presidential politics aside, we have a cycle here where we all go to the polls once every four years, and the president gets elected, and then you have a period where they can't meet all their promises. That cycle has more validity than which party is in power."