Obama, McCain, and the Stock Market

(page 2 of 2)

The House of Representatives, meanwhile, could be dominated by Democrats pushing for sweeping legislation. "Activist legislation would move pretty quickly," Valliere says.

It might be more like a "parliamentary system of government," Kelly says, with legislation molded by powerful liberals including New York Representative Charles Rangel, who as chair of the House Ways & Means Committee oversees tax policy.

If McCain wins, would he be able to hold back this liberal tide? On some issues, perhaps. But many are skeptical.

McCain differs with other Republicans by, like Obama, proposing a plan to fight climate change. On taxes and health care, he has adopted traditional Republican positions, but in the past he has voted against tax cuts and supported tighter regulations on the health-care industry.

Given this history, McCain might be more likely to compromise with Democrats than President Bush has been. "McCain is hardly your George Bush Republican," Valliere says.

Market Uncertainties

Tax cuts enacted by Bush automatically expire in 2010. That reality, and a large budget deficit, lead many strategists to predict federal taxes will rise whoever is elected to the Presidency.

Strategas' Clifton expects that a President McCain and a Democratic Congress would eventually reach some "grand deal" on the budget that would inevitably include some tax increases. However, Obama, if elected, might enact a tax increase earlier than McCain. Some tax changes might be retroactive to the beginning of 2009, prompting Clifton to recommend companies pay employee bonuses in December 2008, rather than January 2009, to avoid extra taxes.

The stock market tends to dislike uncertainty, and the election—and the potential for major policy changes next year—may be weighing on the market. "The uncertainty is most acute on taxes," Valliere says. Of particular concern are potential increases in capital gains and dividend taxes, which directly affect investors.

Some investors celebrated this month when the Obama campaign indicated it would cap its capital-gain tax rate at 20%—not the 28% rate that existed before Clinton took office. In response, UBS (UBS) strategist David Bianco called that "a good sign" in a note titled Maybe Investors Shouldn't Fear Obama.

Dividing Lines

The dividing lines between Obama and McCain in the election campaign are clear on issues including health care and trade. They also are expected to govern differently on many other areas that directly affect the stock market. An Obama Administration may be more strict regarding antitrust regulation, making big acquisitions more difficult to accomplish. Telecom analysts generally assume a Federal Communications Commission under McCain will be more sympathetic to the big, established telecom firms such as AT&T (T) and Verizon Communications (VZ), while Obama's FCC may favor smaller newcomers.

But while listening to candidates at political conventions and reading their platforms, investors must use what we'll politely call a reality detector: They must decide which promises are genuine and which policies could actually be enacted. Change is the campaign theme of 2008, but many observers disagree on just how much change is really possible.

Deutsche Bank's Kelly predicts the next couple years in Washington are "going to be fascinating." He says: "Whoever wins, it's going to be so different from what we've seen in the last 20 or 30 years."

Steverman is a reporter for BusinessWeek's Investing channel.