S&P's 2008 Election Outlook

Next year's Presidential contest could have big implications for defense, health-care, and energy stocks

by Beth Piskora From Standard & Poor's Equity Research

From Standard & Poor's weekly investing newsletter The Outlook

While it's impossible to predict the No. 1 news event of 2008, there's no doubt the U.S. Presidential election will be a contender for the top spot. Will the Democrats retake control of the Presidency? Will Republicans maintain their hold? Will a third-party contender be the surprise choice? While Standard & Poor's Equity Research cannot predict the outcome of the Presidential election, our strategists and analysts believe news from all the candidates will certainly move markets in 2008.

In general, the Standard & Poor's 500-stock index has performed well during Presidential election years, showing average election-year gains of 8.6% since 1945. The market has posted gains 80% of the time in Presidential election years.

While past performance is no guarantee of future results, S&P's Investment Policy Committee believes (based on many factors, including the Presidential election cycle) the S&P 500 will end 2008 at 1,650. That would represent a 6% increase from our yearend 2007 target of 1,560.

S&P Chief Investment Strategist Sam Stovall foresees three major Presidential election campaign issues: 1) Iraq/defense spending, 2) health care, and 3) energy.

Industrials/Defense

S&P thinks the 2008 election could be very significant for defense contractors, particularly if there are Democratic majorities in both houses of Congress and a Democratic President. Following such a victory, we would likely become neutral on the defense sector vs. our current positive stance, due to the projected reduction in defense spending.

We also think both parties will generally support spending on projects related to construction and engineering and industrial machinery, although the two parties might favor different types of projects in these areas. We expect the Democrats would focus more on environmental projects, including emissions control, water infrastructure, and alternative energy. We see the Republicans, on the other hand, being more interested in a larger budget for the Defense Dept. and the Homeland Security Dept., which, on top of aiding defense companies, would also likely assist construction and engineering companies that serve that area.

Of course, any spending related to the maintenance of our nation's infrastructure from a safety standpoint (following the Minneapolis bridge collapse) will be spoken about favorably by both parties. We see a large potential positive impact from infrastructure upgrades for bridges (which could benefit Lincoln Electric (LECO), Illinois Tool Works (ITW), and Kennametal (KMT)); roads (potentially benefiting Astec Industries (ASTE), Terex (TEX), and Bucyrus International (BUCY)); energy infrastructure (likely aiding Emerson Electric (EMR) and ABB (ABB)); and greater efficiency in manufacturing (which could benefit ABB, Emerson, Rockwell Automation (ROK), and Roper Industries (ROP)).

In terms of trucks and rails, the Democrats appear more willing to regulate or impose more restrictions on the transportation sector. This could make operating trucks and trains more costly.

There are two areas where we could see politicians becoming active (not necessarily tied to the Presidential election): 1) an increase in the fuel tax and, 2) at the state level, general increases in sales and corporate tax rates.