BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY

The Bushdaq vs. the Goredex
Wall Street tracks which stocks will gain from which candidate

On Aug. 17, Vice-President Al Gore used his speech to the Democratic National Convention to criticize big tobacco companies and pharmaceutical manufacturers. The next day, shares of Philip Morris Cos. ( MO) dropped 5% and the American Stock Exchange pharmaceutical index was nicked 2.1%.

For good reasons, ups and downs in this fall's White House race between Gore and George W. Bush have triggered more ups and downs than usual in the stock market. For starters, the election is coming on the heels of a 10- year bull market. During that period, nearly half of American households--a record--have come to own equities. ''More people are tuned into what moves stocks than in previous elections,'' says Charles Gabriel, senior political analyst at Prudential Securities Inc. ''The new 'investor class' is asserting itself.''

Consequently, as rhetoric from both sides has favored or targeted various industries, Wall Street has reacted. Investors have bought and sold related companies on the perceived strength and weakness of each candidate.

Several investment firms have gone so far as to create indexes of stocks that they believe will benefit from either a Bush or a Gore win. Wall Street consultancy ISI Group and investment firms Lehman Bros. and Prudential Securities have each come up with portfolios of so-called Bush stocks and Gore stocks.

DRUG BOON? ISI's Bush index is weighted toward drugmakers, defense contractors, tobacco, Microsoft ( MSFT), and mutual funds. The rationale: Investors believe Bush is less likely than Gore to try to control drug prices, but would likely boost defense spending. They also think a more pro-business Bush would shelve the federal tobacco lawsuit and shy away from a Microsoft breakup. And Bush would spur investment by privatizing Social Security and expanding IRAs--a boon to financial firms.

The Gore index put together by ISI favors a different crowd. It includes environmental consultants, Microsoft's competitors, government-sponsored entities such as Fannie Mae ( FNM), and pharmacy benefits managers. ISI reasons Gore would increase environmental regulation and pursue a breakup of Microsoft. His Administration would abandon attempts by House GOP lawmakers to overhaul Fannie Mae and enlist benefits managers like Express Scripts Inc. to help control drug prices. The Gore index also includes short positions. The bets on which stocks will fall include drugmakers, tobacco companies, and HMOs, since Gore has vowed to crack down on each.

So how well have the indexes done? When Gore pulled ahead of Bush in late August through early September, his index outperformed Bush's by 6%. And when Bush gained an edge in early October following the debates, his index beat Gore's by 6%. Currently the indexes slightly favor the stocks that would benefit under Bush.

That reflects most equity investors' belief that Bush would be more market-friendly than Gore, says Kim Wallace, Lehman's chief political analyst. However, he adds, ''the outcome is unlikely to be adverse for the market under either candidate.'' Reassuring as that may be, it doesn't stop investors from putting down their bets.

By Laura Cohn in Washington

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