I did not read the article, How the Election Could Move the Markets,
but I just don't understand. Wal-Mart is a company trying to be nice
to consumers, it lets the poor be able to buy something at acceptable
price. How could Wal-Mart be against the poor and its rep-Democrats?
Who is the Democrat? The Union? or the poor?
OCTOBER 27, 2006 News Analysis By Marc Hogan
How the Election Could Move the Markets
If Democrats take back Congress, it could spell trouble for the likes
of Wal-Mart and Big Pharma—and profits for alternative-energy
providers
With less than two weeks to go, it's still anybody's guess which party
will come out on top in the Nov. 7 midterm elections. Poll numbers for
President Bush and the Republicans remain dismal amid ongoing Iraq
violence and the aftermath of an ethics scandal involving former Rep.
Mark Foley (R-Fla.), but the GOP may still be able to hold onto one or
both houses of Congress, analysts say (see BusinessWeek, 10/16/06,
"Graphic: The Election at a Glance"). Either way, some investors are
probably worrying what the elections could mean for the markets.
In a USA Today/Gallup poll released Oct. 24, 54% of likely voters said
they favored the Democratic candidate in their district, while 41%
picked the Republican. This 13 percentage-point gap represented a drop
from the prior week, but equaled the advantage Republicans enjoyed two
weeks before their sweeping 1994 electoral gains. Still, the GOP
should benefit from a relatively small number of vulnerable seats and
the overall Republican tilt of the most hotly contested districts,
according to Goldman Sachs (GS) economist Chuck Berwick.
Whether it's the donkey or the elephant that emerges triumphant,
investors shouldn't get too carried away. A shakeup in the Beltway
probably wouldn't shake up a well-diversified portfolio, analysts say.
"There's no evidence of a statistically significant relationship
between political control of Washington and the stock market," notes
Mark Riepe, senior vice-president at the Schwab Center for Investment
Research (SCHW). Riepe analyzed the total rate of return for the
Standard & Poor's 500 index since 1953 and found differences in
partisan power had little impact on broader market direction.
New Discussions The current campaign season isn't anticipated to be
much different. "We are hard-pressed to think of a major
stock-market-moving event that is likely to come from the midterm
elections," Tobias Levkovich, chief U.S. equity strategist at
Citigroup (C), wrote in an Oct. 12 note to clients.
Nevertheless, winds of change in Washington might bring new risks—or
some advantages—for a few specific stocks and industries (see
BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock"). While a
Democratic majority in either chamber would still face the threat of a
Presidential veto, any change in leadership might at least change the
topics of discussion on the Hill. Companies in the pharmaceuticals and
energy sectors might be affected, analysts say, as could Wal-Mart
(WMT). Among the stocks most widely expected to get hurt by Democratic
gains are drugmakers, such as Johnson & Johnson (JNJ) or Pfizer (PFE).
If Dems take control of even one house, it would raise the odds
Congress might amend the Medicare Part D legislation to let the
government negotiate drug prices, according to UBS (UBS) strategist
Thomas Doerflinger. Democratic lawmakers probably wouldn't succeed in
changing the law during Bush's Presidency, but the pharmaceutical
sector would still face a "sentiment risk," Doerflinger wrote in an
Oct. 18 report.
Energy Surge Investors could get particularly nervous if Democrats
take both the house and the Senate, according to Peter Morici, a
professor at the University of Maryland School of Business who served
as chief economist at the U.S. International Trade Commission under
President Clinton. "Looking down the road, if people see a Democratic
Congress, they will start thinking of a Democratic President," Morici
says. "And they'll start thinking of the consequences for the
health-care industry."
In the energy sector, changes in Congress might leave both winners and
losers. On the one hand, a potential push to repeal oil-industry tax
breaks or impose gasoline taxes could have negative implications for
oil stocks, such as Exxon Mobil (XOM) or Chevron (CVX), UBS's
Doerflinger notes. But, he says, Democrats' preference for cleaner
fuels could be bullish for General Electric (GE), which manufactures
gas turbines, and for alternative-energy plays like Energy Conversion
(ENER), MEMC Electronic Materials (WFR), Cypress Semiconductor (CY),
or Diversa (DVSA).
Longtime liberal bugaboo Wal-Mart may also come under pressure. The
retail giant has recently increased its contributions to Democrats
(see BusinessWeek, 10/2/06, "How Business Is Wooing Democrats").
Still, control of the House would probably encourage Democrats to push
legislation making it more difficult for Wal-Mart to get a charter
that would allow it to process some financial transactions internally,
says Andrew Parmentier, managing director of Washington policy
analysis at Friedman Billings Ramsey (FBR). Under the Microscope Loan
providers could also come under the microscope. Current House Minority
Leader Nancy Pelosi (D-Calif.) has listed cutting student loan
interest rates in half as something a Democratic House would
accomplish within its first 100 hours in office. S&P downgraded shares
of Sallie Mae (SLM) to hold on Oct. 9, citing the possibility of
adverse legislation.
Tougher rules for adjustable-rate mortgages might also be in the cards
in a Democratic Congress. S&P recently downgraded several regional
banks that do mortgage-origination business, including FirstMerit
(FMER), Commerce Bancorp (CBH), and Wilmington Trust (WL). On the plus
side, S&P sees good news for Fannie Mae (FNM) and Freddie Mac (FRM) if
new laws push borrowers toward fixed-rate loans.
A variety of other industries could face scrutiny. If the Dems put
forth legislation on "Net neutrality," it could hurt telecom companies
like AT&T (T), according to Doerflinger. However, he predicts that
defense industry would remain strong, even though Halliburton (HAL)
could face the risk of Congressional hearings investigating the
process by which a subsidiary was awarded contracts for reconstruction
and development work in Iraq. "If defense stocks trade down on a
Democratic win, we believe it could create a buying opportunity,"
Doerflinger says.
Whatever happens Nov. 7, analysts say, investors looking to trade on
the results shouldn't change their long-term allocations, and they
probably shouldn't wait until Election Day. Politics may be tough to
predict—remember "Dewey Defeats Truman"—but that doesn't mean Wall
Street isn't already trying.
________________________________
Hogan is a reporter for BusinessWeek.com in New York
