BrokerAdviser.com - Dems or Republicans--Does it Really Matter to an Investor?

Volume 3, Issue 6
February 5, 2008

Dems or Republicans—Does it Really Matter to an Investor?

By Nancy Zambell, Contributing Editor

The election season seems to be getting longer and longer. We are now inundated with campaign ads and debates that — while sometimes entertaining — leave me in awe at the amount of money that is wasted on a process that in most countries lasts a matter of weeks, not months.

According to http://www.opensecrets.org, presidential campaigns have raised almost $600 million so far, with Democrats edging slightly ahead. Projections I’ve seen forecast that a whopping $1 billion will be spent on the ’08 election before it’s over.

Just think: if all that money was wisely invested for the good of our country and its citizens, it would go a long way toward solving our economic woes!

And speaking of investments, I thought it would be interesting to take a look at the effects of elections on the market. There are almost as many election-investment theories as there were presidential candidates a few months ago. And now that those candidates are dwindling, it’s a good time to think about how the markets might react and how the individual investor may fare, based on which candidate and party are elected next fall.

The following chart demonstrates that election years have a tendency to trend up, albeit with some volatility in the middle of the year.

Substantiating the chart, according to a report from Edward Jones brokerage, in nine of the past 11 presidential election years, the Dow Jones Industrial Average gained a little more than 9%. In a similar vein, the Trader’s Almanac reports that the Standard & Poor's 500 stock index has risen in the final seven months of 13 of the last 14 presidential election years.

In the past, markets have usually done well regardless of whether a Democrat or Republican president was elected. But for the individual investor, the real impact may be most strongly felt in particular sectors that may rise or fall, depending on the candidate and his or her pet issues.

For instance, if a Democrat is elected, according to a 1928-1993 study cited by the Financial Analyst’s Journal, small-cap stocks have historically beaten their large-cap brethren’s returns, while returns on bonds — government and corporate — were higher after a Republican was elected.

Edward Jones conducted a poll of market experts to find out what they were predicting for certain sectors after the election. Summarizing his responses, here are some sectors that may to watch for:

Health care: The Dems are looking for a universal health-care program, which would require cost cutting and smaller profit margins to a variety of companies, including hospitals, insurance providers and drug manufacturers, who may see their shares suffer.

Energy: Democrats will most likely advance the cause of global warming, potentially boosting profits in various alternative energy businesses, including solar and ethanol. However, if Republicans win, drilling firms may find their coffers growing as that party will probably increase domestic oil exploration.

Defense: Most Dems want to withdraw from Iraq, while most Republicans intend to stay for awhile and mention increasing troop strength throughout the world. It’s a toss-up for investors, yet we can probably count on more, not less, defense spending in the next few years.

Financials: We won’t easily extricate ourselves from the subprime debacle, and many financial firms will continue to be hurt in the near term. As for the coming election, a Democratic victory may prop up government-sponsored enterprises such as Fannie Mae, Sallie Mae and Freddie Mac (with increased spending), while hurting private student loan companies. Financial companies may also worry about increased regulation and higher taxes under a Democratic regime. If the Republicans win, expect more tax cuts and a continued push to keep estate taxes, as well as taxes on dividends and capital gains, down.

As you can see, it’s practically impossible to plan your investment portfolio around a what-if election scenario. Instead, the more important factors that may vastly impact investment profits in this election year are our domestic economy and the geopolitical climate.

The subprime mess is wreaking havoc in the credit markets: banks are setting aside gigantic sums daily to prop up their previous bad credit decisions and homeowners are being foreclosed upon in record numbers. Credit conditions have drastically tightened and home prices across the country are in a steep decline, creating a worsening housing market. Simultaneously, manufacturing production has been weaker than expected and retail sales for the holiday season were less than stellar.

The war in Iraq is far from won, continuing to cause loss of lives, strained foreign relations and a boosted U.S. deficit. All of these factors will play a much greater role in the performance of this year’s markets than the outcome of the presidential election.

Consequently, investors should stay the course (continue to invest in fundamentally strong companies with good financial performance, suitable to your personal investing strategies and risk profiles) for the long term.

If you want to play the odds and bet on which way the election will go, though, just keep those investments to a small part of your portfolio and have some fun speculating!

Happy Investing!

Nancy

This concludes this week's issue of Financially Fit. We encourage you to visit our website to review past issues of Financially Fit:

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