It might be too early for most of us to think about the potential outcome of this November’s presidential election, but for some investment strategists, it's an issue worth considering.
The U.S. presidential election is, of course, much too early to call, but an escalation of bloodshed in Iraq in recent weeks appears to have made President George W. Bush's re-election hopes less certain, and some investment professionals are already considering how they will shuffle their stock portfolios in the event there is a change of guard at the White House this November.
With the incumbent president looking more vulnerable against his presumptive Democratic challenger, Sen. John Kerry, it’s worth considering how certain stock sectors might be influenced by Kerry presidency, notes Greg Valliere, chief political strategist for Schwab Soundview Capital Markets.
“Prudent portfolio managers have to think about what might happen if Kerry were to win and what might happen to energy, healthcare and defense stocks,” Valliere told CNBC in a recent interview.
If Sen. Kerry is elected as president, it could benefit the shares of generic-drug companies, according to Valliere. The Massachusetts senator has criticized big drug firms and is in favor of the importation of cheaper drugs from Canada, a position that would weigh on the share prices of large drug companies, like Pfizer.
For his part, President Bush is seen as more friendly to the drug industry, according to Chip Hanlon, chief domestic strategist at Euro Pacific Capital.
Bush is more likely to encourage tort reform, help to bring new drugs to market more quickly by putting more market-oriented people in charge at the Food and Drug Administration, and he is also likely to champion more patent protection for drug firms.
But outweighing his pro-drug position is Bush’s Medicare prescription drug benefit, which Congress passed as part of its overhaul of Medicare last year. There is already talk about reining in some of the legislation's largesse, as its estimated price tag is now reportedly estimated at $500 billion plus over the next decade.
“The only way the government can fulfill its promise is through price control,” Hanlon said. “The government will force drug companies to sell at certain prices, and that will hurt the profitability of the drug companies involved after November.”
More straightforward, notes Hanlon, is the relationship between the candidates and the defense sector.
Both Kerry and Bush are expected to spend more on counter-terrorism, but Bush is seen as a more military-minded president. Kerry, on the other hand, is against big-ticket items like the U.S.-led, $200 billion project by a consortium of NATO countries to develop a joint strike fighter.
The Iraq war, of course, will be a large feature of any defense spending. Bush is expected to prolong U.S. involvement in Iraq, and might even enlarge it, while Kerry is more likely to find a way to end the U.S. engagement. With this in mind, defense stocks are generally expected to react more positively to the possibility of a Bush victory than if Kerry wins this November.
“It’s pretty clear that people think Bush is more bullish for the defense sector than Kerry because we’ll obviously have a lot more defense spending if we remain in Iraq,” Hanlon said. “The longer we spend there the more money we spend on troops and supplies and arms.”
Analysts also say the prospect of a Kerry victory may weigh on energy-related stocks.
Kerry has opposed President Bush’s tax incentives for oil, natural gas and nuclear power companies, and is seen preferring alternative energy sectors, like wind and solar. He is also likely to be more restrictive when it comes to making the United States us more energy independent by expanding domestic drilling for oil on nature reserves and other public lands.
But ultimately, Kerry’s stance may be a benefit for the shares of energy-related companies said Hanlon. “At a time when prices are high and supplies are tight, he won’t make it easier to find more oil, so the price of energy will stay high, and that will benefit energy firms,” he said.
When it comes to taxes, Kerry is expected to reverse tax cuts for the upper-income brackets and possibly rein in the dividend tax cut, according to Bob Benson, senior market strategist, Banc of America Capital Management. The belief that Kerry is the front-runner for the White House may weigh on dividend-paying stocks.
But even with a Democrat in the White House, legislative gridlock may reign, analysts note, as the Republicans are still likely to control one of the houses in Congress.
