The decision you make about presidential candidates will lead to a logical vote in the polling booth. Unfortunately, those same political beliefs could become a stumbling block in your personal investments.
"I have Democratic friends who didn't buy into the tax cut and its impact on the market, so they missed the early part of the rally," said Barry Ritholtz, market analyst with the Maxim Group global money management firm in New York. "I also have Republican friends who were caught off-guard by the recent market sell-off because they weren't paying attention to things like budget deficits."
Lead with your brain rather than your heart when investing. Consider all the angles in the countdown to the presidential election, noting those industries and stocks likely to benefit in differing situations.
The defense industry would be a big winner in a second term for President Bush, Ritholtz reasons, which is why Lockheed Martin Corp. (LMT) is on his buy list. Because of its extensive oil exploration and highly publicized work in Iraq, Halliburton Co. (HAL) is another "Republican" pick on his list.
A Democrat in the White House could mean greater emphasis on alternative forms of energy and possibly research credits or tax incentives, Ritholtz says.
That would benefit the stock of oil company BP PLC (BP), the most aggressive company in its industry in researching and developing alternative fuels.
Historically, the third year of a presidential term is the best-performing year for stocks, and the fourth year ranks second-best. That bodes well for the stock market this year. But sometimes Wall Street worries about one candidate or party over another are overwrought, because many other domestic and world issues affect investments.
"Overall, the stock market does as well under Democratic presidents as under Republican presidents, which means that the market should be indifferent to the outcome of the election," said Thomas Gallagher, political economist with the International Strategy and Investment Group research firm in Washington. "For example, on an issue such as interest rates, it's the Federal Reserve that really matters."
Yet, there are differences.
In fiscal policy, Democrats would seek lower budget deficits, and that would benefit bonds.
The Bush administration acknowledges that the federal budget, expected to run a deficit of $477 billion in fiscal 2004, wouldn't be balanced during a second Bush term. However, it says the deficit could be cut in half over the next five years.
Criticism of deficit
Bush is criticized for the big deficit not only by Democrats, but also by conservative Republicans who favor small government and consider enormous deficits to be heresy. They fear that Republicans have lost their image as the party most capable of reining in government spending.
Democrats could push for stronger regulation in areas such as stock trading, where scandals have abounded. And, though Democrats historically have been considered protectionist in their trade policies, that's not the case with the current front-running Democratic presidential candidate, Sen. John Kerry of Massachusetts.
For now, Bush's initial tax cuts are helping him.
"The maximum benefit of the Bush administration's tax cuts are being seen from last year's third quarter to this year's third quarter, ensuring strong economic growth up to the election," said Ned Riley, chief investment strategist with State Street Global Advisors in Boston. "Policies that might get the ax if a Democrat is elected are tax cuts, at least those for upper-income families, and the tax reduction on dividends."
Democrats might write a tougher health care bill, which could take a toll on profits of the pharmaceutical industry and medical care providers.
Wall Street sympathies generally lie with Republican administrations, which is why the stock market might gyrate based on who is leading the polls.
The perceived likelihood of a Bush victory had been factored into the market for a while, so any shifts in popularity will be monitored carefully.
Wall Street hedges bets
Wall Street has hedged its financial bets. Bush leads in campaign contributions from banks and investment houses, but adding up similar contributions to all Democratic candidates produces a total that's not far behind.
"If prospects for the re-election of President Bush improve, the stock market benefits," said Hugh Johnson, chief investment officer with First Albany Corp. in Albany, N.Y. "If those prospects deteriorate, the stock market suffers."
It's not good news for investors that each Democratic presidential hopeful is recommending rolling back the Bush tax cuts, Johnson said.
A Republican victory would benefit health care stocks such as Aetna Inc. (AET) and UnitedHealth Group (UNH); pharmaceutical stocks Pfizer Inc. (PFE) and Merck & Co. (MRK); and defense stocks Lockheed Martin Corp. (LMT) and General Dynamics Corp. (GD), Johnson predicts.
A Democratic victory might boost the stock of consumer staples Clorox Co. (CLX), Procter & Gamble (PG) and PepsiCo (PEP) because they would gain investors if the economy faltered, he said.
Johnson owns shares of Aetna, Clorox, General Dynamics, PepsiCo and Pfizer.
"For stock investors, the economy is headed in the right direction, so it should be a good year for stocks," said Mark Zandi, chief economist with Economy.com in West Chester, Pa. "For bond investors, regardless of who's elected president, it's going to be more difficult."
Andrew Leckey is a Tribune Media Services columnist.