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Markets: The Politics of Investing
New York: November 09, 2004
By John R. Stephenson

With the outcome of the U.S. presidential election no longer in doubt, we turn our focus to where opportunities lie for investors. President Bush is looking toward his second term to reform the disastrous Social Security system and to modify the tax system - two huge goals to be sure. There is no doubt that he can push ahead with an aggressive agenda given his impressive win (record voter turnout of 112 million and control of both houses) - but will he? Probably. The President has already told us that he has political capital and he plans on spending it, but where should you as a savvy investor look to put money to work over the next few months?

History can help us out with the answer to this question. Typically, health care and energy have tended to outperform under republican administrations in the two months following an election. During the campaign, President Bush expressed little interest in slapping price controls on prescription drugs or in encouraging greater fuel efficiency for carmakers. With oil prices high and an aggressive preemptive-strike foreign policy alive and well, the price for oil is likely to remain elevated. This should continue to support energy stocks in the months to come.

Corporate America will be looking toward government for a new, simpler tax regime and for the administration to make the tax cuts Bush brought in during his first term in office permanent. On the tax front, one possibility that has been floated is to scrap the federal income tax system and replace it with a national sales tax. If this measure were to pass, it would simplify the accounting dramatically for businesses and consumers but would likely slow consumption and would send accountants and tax preparers scurrying for cover.

The historical results for the stock market under both Republicans and Democrats are a bit of a mixed bag. The S&P 500 has recorded higher returns under Republicans in the two months following the election but better overall returns over the four-year term for Democrats. In general, health care has tended to outperform the S&P 500 in both the 60-day and one-year time frame following the election. This should remain true again as the Republican control of the White House and Congress is likely to be supportive of health care stocks - particularly pharmaceutical stocks. Look for a further boon in the health care sector if the Republicans pass tort reform putting a cap on medical malpractice suits.

Because of the role that government plays as both a regulator and a significant player in the industry, healthcare is likely to benefit more than any other sector from a Bush victory. Under a democratic administration there would likely have been greater drug re-importation (from Canada) and higher utilization of generic drugs, which would have been negative for healthcare companies. Prescription drugs are a huge industry (17 % of the U.S. population takes these medications) accounting for 53% of all drug spending. Not only is the current administration supportive of the healthcare sector, but also the long-term trends (an aging U.S. population) favor the sector. Today, the fastest growing segment of the U.S. population is people over 85 years of age.

Figure 1: Sector Performance following Presidential Election Day

Source: Compustat, I/B/E/S, and Goldman Sachs Research

Energy is another likely winner as this sector has typically outperformed the market in the two months following the election. In our view, the out performance of this sector is likely to continue for a while as supply imbalances and continued geopolitical tensions are likely to persist over the next five years or more. The positive outlook for energy stocks is unlikely to change in the next several years as crude oil futures prices remain at 15-year highs giving energy firms the necessary cash flow to explore for oil in the far-flung regions of the world. Refiners should also continue to do well as capacity remains constrained (the last refinery built in the U.S. was in 1976) and has failed to keep pace with the growth in demand for gasoline. So far this year, the price of crude oil has spiked some 60% and the returns to the sector are up 26%. Look for energy stocks to outperform the market in the years ahead as more and more money is directed toward this sector.

Within the insurance industry, the non-life sector should do particularly well in the wake of a Republican win. This is particularly true because voters have turned out the long-time Democrat and minority house leader in the U.S. senate - Tom Daschle. Senator Daschle was widely viewed as being an obstacle towards: 1) the creation of an asbestos trust fund, 2) class action reform and 3) the capping of medical malpractice awards. With a clear Republican victory and a fiscally conservative minority of Democrats, there exists a strong possibility for all of these issues to be resolved favorably for the industry. Not only is positive legislative reform a likely possibility for the insurance industry but also the trend of premiums rising faster than costs is likely to continue for the foreseeable future.

In our view one area to avoid is aerospace and defense where spending will likely be reigned in by concerns over the huge government deficit. This sector is likely to see a rollback in year over year spending increases as the politics of the campaign recede and legislators begin to worry about the escalating costs.

The next few months should be good for investors as the stock market tends to do well in the short-run following a Republican victory. In the longer term, investors in the energy healthcare and non-life insurance segments of the market should prosper.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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