This presidential election is shaping up to be as much of a nail-biter as the previous one. And that uncertainty is likely to keep the financial markets on tenterhooks right up to Election Day.
But once all of the states are colored red or blue, neither outcome will likely roil the markets. Even if John Kerry prevails over George W. Bush, and even if the Democrats take back the Senate on his coattails, Republicans will probably maintain control of the House. Legislative gridlock will set in, and as the past has shown, financial markets are partial to gridlock.
Despite his campaign promises, it will be hard for Kerry to undo the Bush income-tax cuts. The best he could hope for would be to let the current 15% rate for dividends and capital gains expire as scheduled at the end of 2008. That could potentially hurt shares of dividend-paying companies toward the end of his term. Under Kerry's plan, if your household earns more than $200,000, your long-term gains would be taxed at 20% and your dividends would be taxable at rates of up to 39.6%.
The biggest impact on the stock market of a Kerry presidency would likely come from regulatory, not legislative, changes, says Greg Valliere, chief political strategist for the Schwab Washington Research Group. Sectors that would get a boost include alternative energy, generic drugs, health-care providers and homeland security. A Kerry win would also be good news for Fannie Mae and Freddie Mac, which face the prospect of greater oversight under Bush. Defense stocks, on the other hand, would come under fire. The Democratic challenger favors canceling or scaling back some big-ticket defense programs.
If Bush gets a second term, the traditional-energy sector and the defense sector would both breathe a sigh of relief. Peter Cohan, an executive-in-residence at Babson College, has put together an index of publicly traded companies in the coal, oil, refining, natural-gas and defense industries. He calculates that, as a group, those stocks were up 43% between January 2001 and July 2004. In contrast, Standard & Poor's 500-stock index was down 18% for the same period. "If Bush is reelected, those industries will continue to do well," predicts Cohan.
Neither candidate would please the bond market because neither would be likely to make a significant dent in the budget deficit. Kerry would be hard-pressed to get a tax increase through Congress, and he'd try to spend more federal dollars on health care than Bush. For his part, Bush would try to make his tax cuts permanent and could reform social security -- a long shot.
If the Democrats gain control of the Senate, both contenders would face gridlock. That may please the markets, says Valliere, but it has its own cost: "Some very important issues, such as energy reform and fixing the alternative minimum tax, are neglected."
MAGAZINE
