|
|
Get Four
|  | JULY 9, 2004
By Amey Stone Should Investors Fear a President Kerry? Maybe not. Recent history shows post-election rallies after a Dem win. So, a pre-November sell-off could become a buying opportunity When the somewhat stern John Kerry picked the sunny John Edwards as his Vice-Presidential running mate on July 6, many investors shuddered. Although the announcement didn't have a major impact on a down day in the markets, it was another energy jolt for a Democratic ticket that's starting to look like it just might be able to unseat President George W. Bush (see BW Online, 7/7/04, "John Edwards and Kerry's Will to Win"). Looking ahead, the general consensus among investment professionals is that stocks will sell off if the Kerry-Edwards ticket continues to gain momentum. But that doesn't mean the market will stay down if Kerry wins. In fact, such a sell-off might prove a good buying opportunity by yearend. In the short term, though, stocks could suffer. Bush and Kerry continue to swap the lead in national polls and have done so several times in the past few months –- usually by a narrow margin. "When Kerry has done a little better, the market has done a little worse," says Trip Jones, managing director of sales at SunGard Institutional Brokerage. Now he believes Kerry could get the next bounce in the polls, partly because of the lift from picking Edwards and also because the Democratic National Convention is first up in Boston later in July. REALITY CHECK. That boost for Kerry could show up in the markets as a negative for stocks. "The more potential energy Democrats muster now, the more markets are likely to discount [a Kerry win] in advance" and sell stocks, says Michael Panzner, a trader at Rabo Securities and author of the upcoming book, The New Laws of the Stock Market Jungle. Yet as is often the case with long-anticipated events, the market tends to reverse when reality hits. So Panzner foresees a sell-off in the short term and a "buy on the fact" upswing for stocks after the election if Kerry wins. A look at history bears this out. The last two times Democrats defeated sitting Republicans –- 1976 and 1992 -- the Standard & Poor's 500-stock index fell 8% and 5%, respectively, in the run-up to the election as investors anticipated the change, according to data from research firm ISI Group. However, both times stocks staged post-election rallies. "As with most things in the markets -- and in life for that matter -- the fear of change is often far greater than the change itself," wrote Jason Trennert, ISI Group's equity strategist, in a May 28 report titled, "High Anxiety: How the Prospects for a Kerry Victory Could Make for a Rocky Autumn." GOODWILL BOOST. There's another reason stocks tend to outperform during Democratic Administrations: Investors often "overreact on the negative side to Democrats," says Peter Cohan, an author and management consultant in Marlborough, Mass. That sets Democrats up to "exceed low expectations" once in office, he says. This time around, these dynamics could be magnified, particularly with Edwards, who Moody's Investor Services calls "a trial lawyer's trial lawyer," on the ticket. Business interests, already concerned that a Kerry Administration would repeal tax cuts and increase regulation, are vexed by Edwards' career as a successful litigator. "More in the way of government regulation and litigation probably imply less output, fewer jobs, and higher inflation," a July 6 report from Moody's surmised. However, if Kerry wins, Panzner believes a fresh Administration could generate enough goodwill both internationally and from segments of the domestic population that haven't benefited from Bush's policies that a Kerry win could be a plus for the market. "It might be a positive for sentiment generally and the stock market as well," he says. WISHFUL THINKING? Cohan, who's part of a group called "Business Leaders for Kerry," believes the senator's policies would benefit high-growth sectors like biotech, broadband, and alternative energy. He also says Kerry's plans to bolster math and science education would have long-term benefits for the economy and markets. Despite the neck-in-neck voter polls, investors remain convinced that Bush will win. ISI Group says its surveys have found that 70% to 80% of portfolio managers believe Bush will be reelected. Could this be wishful thinking? "I really wonder whether the investment community has adequately priced in the potential for change in Administration and all the attendant anxieties about the impact of higher taxes that would entail," wrote Trennert in his May 28 report, which he said on July 7 still accurately reflects his views. And with four months until Election Day, Bush has plenty of time to rally. In a July 7 commentary, Donald Luskin of research boutique Trend Macrolytics ventured, "If we had to guess, it would be that Bush will be reelected and that his tax policies would survive to at least 2008," which "would bode well for a significant rally in the fourth quarter." LONG-TERM PLANNING. Until the election's outcome is known, though, the markets could be in for a rocky few months. "It would be foolish to say any sell-off could be a buying opportunity," notes Panzner. Investors still have to deal with the uncertainty of corporate earnings, rising interest rates, a possible slowdown in consumer spending, the high price of oil, and ongoing geopolitical risks. However, if it turns out that further political momentum for Kerry and Edwards turns into a near-term negative for financial markets, that could easily reverse itself once the election is over –- regardless of who prevails in November.  Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist Edited by Beth Belton
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
