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Andrew Allentuck

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Split decisions

Andrew Allentuck


WINNIPEG (GlobeinvestorGOLD) — Economic fundamentalists beware: If history is a guide, the outcome of this year’s U.S. presidential election could have a major impact on capital markets.

If one accepts the candidates’ statements as accurate indicators of what they will do if elected, then policy implications follow. John Kerry’s promises to roll back Bush tax cuts imply increasing federal revenues, said Bob Doll, President of New York-based Merrill Lynch Investment Managers. Declining federal debt would allow interest rate reductions, a process that would tend to push up bond prices. In contrast, a Bush victory suggests that his first term cuts in upper income personal income taxes, corporate taxes and succession duties would become permanent. The implication — more money for investment in stocks, Mr. Doll said.

A Bush victory might be good for stocks, but historical data tend to show that a Kerry victory would be even more bullish. In a study that was published in Oct., 2000 in the prestigious Journal of Finance, UCLA professors Rossen I. Valkanov and Pedro Santa-Clara noted that there is an measurable difference in stock market performance between Republican and Democratic regimes. On an annualized basis, U.S. markets turn in 5 per cent more each year in periods when Democrats control the White House, they concluded. The study, which has been widely quoted in forecasts for the 2004 election, validates the widely-held view that Democrats are better for business than their Republican opponents.

Another study of post-election market performance authored by political scientists Bumba Mukherjee of Florida State University and David Leblang of the University of Colorado shows that market volatility is lower under Democratic administrations than under Republican governments. For investors, either outcome supports broad market investment in index instruments. Their study implies, however, that options, which flourish on volatility, will tend to do better with a Republican administration.

The candidates have distinctive approaches to economic policy. According to Bill Onslow, Senior Vice President for Natcan Investment Management in Toronto and manager of $1-billion in U.S. equities, stocks will thrive or suffer depending on the election outcome.

"Drug makers such as Merck & Co. and Pfizer Inc. and pharmaceutical benefit managers like Caremark Rx Inc. will tend to do better under Bush than Kerry," Mr. Onslow said. "Bush would leave pricing in the hands of the private sector while Kerry indicates he would seek to control drug pricing."

A continuation of the Bush presidency would favour traditional energy companies, Onslow added. Coal miners such as Peabody Energy Corp. and Arch Coal Inc. would be able to go about their business as usual. "Candidate Kerry has indicated a desire to control uses of coal for electricity production and to force conversion to natural gas," Mr. Onslow added. Kerry also favours innovative power sources, he noted. That implies benefits for makers of wind-driven electric generators, a group that includes the GE Energy unit of General Electric Co.

In defense, a second Bush term implies that contractors such as Lockheed Martin Corp., General Dynamics Corp. and Raytheon Co., each of which specializes in defense work, would benefit from continued war spending, Mr. Onslow said. A Kerry presidency might allocate defense spending elsewhere, he added.

In retailing, the candidates’ policies will favour different kinds of companies.

Mr. Kerry has suggested he would roll back tax benefits for upper income taxpayers and shift more tax liability to upper income spenders. That implies hard times for posh retailers such as Tiffany & Co.. If tax burdens on lower income shoppers were to be lightened, mass market retailers like Wal-Mart Stores Inc. and Target Corp. could benefit, Mr. Onslow said.

Upstream, manufacturers of toys could gain if there were more cash in the hands of young, credit-dependent families with children. The benefits of increased mass market spending could trickle down to manufacturers. For example, Mattel Inc., struggling with a dramatic drop in the sales of Barbie dolls, could see a revival of its fortunes from a Kerry administration.

Financial services companies could be affected by the election outcome. Under a second Bush term, property and casualty insurers like Allstate Corp. might face reform of tort law to limit insurers’ liabilities, Mr. Doll noted. In contrast, a Kerry presidency with the vice presidency held by former personal injury lawyer John Edwards might see the present system unchanged, Mr. Doll noted.

Basing investment decisions on election outcomes is tricky business. Many portfolio managers prefer to rely on conventional financial analysis. But an uncertain outcome, such as the months of indecision following the Nov., 2000 squabble over the Florida vote, could send stocks into a funk. Markets hate uncertainty and often grasp at straws, such as divining economic policy from political promises.

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

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