Posted by: Ben Steverman on January 10, 2008
This presidential election is on a lot of minds these days, including mine. I’m a total politics junky, so I enjoyed looking at the implications of a Democratic or Republican victory on the stock market in a story this week.
Americans’ choice for president will almost certainly influence sectors like defense (facing a possible pullout of Iraq) and health care (facing mostly Democratic reform efforts, including proposals for universal health care).
And I talked with several fund managers and advisors who worried about protectionism and efforts to repeal President Bush’s tax cuts. Free trade and lower taxes are an integral part of the Wall Street creed.
The outcome of this presidential election is very important for the nation and the world, but how much does it really matter for investors?
A few thoughts:
1. The U.S. defense budget in the next ten years is more likely to be a result of geopolitical realities -- i.e. the level of violence around the world and especially in the Middle East -- than a result of any one president's budget priorities. A president may be able to shape world events, but it's those events -- and the way they reshuffle the new president and Congress' priorities -- that will ultimately push defense firms' revenues higher and lower. If you think the global instability will settle down over the long term, sell defense stocks. If you think it will get worse, buy.
2. The president may shape the long-term direction of the country, but there's a reason Wall Street watches every word spoken by Federal Reserve chairman Ben Bernanke. When it comes to the government influencing the short-term performance of the economy, he's the go-to guy.
3. Some political realities are already reflected in stocks. For example, the Democratic Congress elected in 2006 has already hurt the performance of the health care sector. So don't expect stocks to react to every new poll or primary, unless expectations shift suddenly.
4. For sectors like health care or energy, the devil (or angel?) will be in the details. If a new administration pushes universal health care or pushes hard to reduce emissions that cause global warming, the impact on the economy and on the stock market will depend on how these complex plans are structured. The Congress will have a lot to say about this.
In the final analysis, the presidential election is just a tiny factor influencing stocks over the short- to medium term. The next president will have a big impact, but that will be felt over a decade or more. The direct effects of a new president's policies on particular industries will probably be minimal compared to this broader, more lasting effect. A president who sets the best course for the country is also likely to help stocks and the economy overall.
In other words, "good president" might be the same as "good for stocks." Of course, this is a very subjective judgment with no easy answer, much like the choices U.S. voters are making right now.