How the Election Could Move the Markets

If Democrats take back Congress, it could spell trouble for the likes of Wal-Mart and Big Pharma—and profits for alternative-energy providers

by Marc Hogan

With less than two weeks to go, it's still anybody's guess which party will come out on top in the Nov. 7 midterm elections. Poll numbers for President Bush and the Republicans remain dismal amid ongoing Iraq violence and the aftermath of an ethics scandal involving former Rep. Mark Foley (R-Fla.), but the GOP may still be able to hold onto one or both houses of Congress, analysts say (see BusinessWeek, 10/16/06, "Graphic: The Election at a Glance"). Either way, some investors are probably worrying what the elections could mean for the markets.

In a USA Today/Gallup poll released Oct. 24, 54% of likely voters said they favored the Democratic candidate in their district, while 41% picked the Republican. This 13 percentage-point gap represented a drop from the prior week, but equaled the advantage Republicans enjoyed two weeks before their sweeping 1994 electoral gains. Still, the GOP should benefit from a relatively small number of vulnerable seats and the overall Republican tilt of the most hotly contested districts, according to Goldman Sachs (GS) economist Chuck Berwick.

Whether it's the donkey or the elephant that emerges triumphant, investors shouldn't get too carried away. A shakeup in the Beltway probably wouldn't shake up a well-diversified portfolio, analysts say. "There's no evidence of a statistically significant relationship between political control of Washington and the stock market," notes Mark Riepe, senior vice-president at the Schwab Center for Investment Research (SCHW). Riepe analyzed the total rate of return for the Standard & Poor's 500 index since 1953 and found differences in partisan power had little impact on broader market direction.

New Discussions

The current campaign season isn't anticipated to be much different. "We are hard-pressed to think of a major stock-market-moving event that is likely to come from the midterm elections," Tobias Levkovich, chief U.S. equity strategist at Citigroup (C), wrote in an Oct. 12 note to clients.

Nevertheless, winds of change in Washington might bring new risks—or some advantages—for a few specific stocks and industries (see BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock"). While a Democratic majority in either chamber would still face the threat of a Presidential veto, any change in leadership might at least change the topics of discussion on the Hill. Companies in the pharmaceuticals and energy sectors might be affected, analysts say, as could Wal-Mart (WMT).