Kerry, Bush, who's better for market?

THE BALTIMORE SUN

IF WALL STREET had its way, experts say, President Bush would achieve a feat his father couldn't: a second term.

The Republican president is considered pro-business, favoring lower taxes and less regulation. Plus, Bush is the status quo, so there would presumably be fewer surprises for the next four years - and the stock market hates surprises.

"Wall Street is convinced that Bush will be re-elected," says Jonathan Golub, an equity strategist at J.P. Morgan Fleming Asset Management in New York.

But what if Wall Street is wrong? Would a President John Kerry be bad for investments?

Not if history is a guide: The stock market has often done well with a Democrat in the Oval Office.

Since 1901, Republican presidents have held office for nearly 56 years; Democrats for 48 years. In that time, the Dow Jones industrial average rose 386.7 percent under Republicans. But it rose 639.6 percent under Democrats, according to the Stock Trader's Almanac. And $10,000 invested would have grown to $81,300 under Republicans - and $279,705 under Democrats.

Some experts insist such numbers are meaningless. Other forces hold greater sway over the market than a president, and Democrats were just lucky to enter office when the business cycle was due for an upswing, they say.

But others say Republicans historically have been the party of low deficits and low inflation, a climate particularly favorable for bonds.

"Democrats have been more concerned with employment than with inflation, more interested in promoting growth. Growth is always good for stocks," said Tony Loviscek, an associate finance professor at Seton Hall University in New Jersey.

Because Democrats are less likely to propose tax breaks for corporations, "companies have to work much harder for their profits," said Walter Schubert, chair of the finance department at LaSalle University in Philadelphia. "When that happens, believe it or not, they do better."

The best environment for the market, many say, is a combination of Democrats and Republicans. In other words - gridlock.

"The best combination I found in looking at the different administrations is a Democratic president and Republican-controlled Congress," said Jeffrey Hirsch, publisher of the Stock Trader's Almanac in New Jersey.

"You get the best of both worlds," and what little legislation that gets passed must go through both parties, he said.

As party conventions approach - Democrats meet in Boston this week and Republicans gather in New York next month - investors will hear a lot of promises from the two camps. Some won't go anywhere, particularly if there's gridlock. But other platform proposals could turn into policies that affect investments.

Investors, of course, shouldn't change long-term strategies based on an election. Too many other factors could have as much or even more impact on portfolios, such as the economy, the war on terrorism, corporate earnings or Federal Reserve moves.

With that caveat, here are some likely winners and losers under a Bush and a Kerry presidency:

Defense

With the war in Iraq, and on terrorism, defense stocks will get a boost no matter who sits in the Oval Office, experts said. Still, Bush is viewed as more likely to exercise military might, making him slightly more bullish for the industry, they said.

"The administration has a stated policy of being aggressive in trying to address the problem of terrorism," said Mark Zandi, chief economist with Economy.com in Pennsylvania.

Kerry, a decorated Vietnam War veteran, isn't talking about pulling the plug on the war, but he does propose getting more countries to share the burden of the Iraq war, experts said.

Health care

Bush has been friendly to the pharmaceutical industry. Medicare's new prescription drug program, for instance, doesn't allow the government to negotiate for price cuts with drug companies. Bush would continue to oppose anything that smacks of price controls.

A Kerry administration, on the other hand, would press for concessions on prices in the Medicare drug program and permit lower-priced drugs to be re-imported from Canada, experts said.

Other health care companies would benefit under Kerry, some said. What Kerry doesn't spend on defense would be shifted to health care for lower-income families, said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.

"HMOs, hospitals and all these health care providers would benefit. There will be more dollars for them," he said.

Energy

Old-line energy companies that drill for oil and mine for coal would be treated more favorably under a Bush administration that is headed by two former oilmen, experts said. "The government is doing all it can to increase the likelihood that the traditional oil companies will be able to bolster production," Schubert said.

Kerry favors less dependence on oil and wants to boost the use of renewable sources of energy, such as wind and solar power. "He might require utilities to produce 20 percent of their electricity from these renewable sources," by 2020, Sohn said. That's up from 2 percent today.

Utilities might be hurt in the short run having to spend more to meet the new requirements, but benefit over the long haul, Sohn said. Also, companies involved in developing alternative energy sources would get a boost under Kerry.

Mortgage companies

Republicans are longtime critics of Freddie Mac and Fannie Mae, the government-sponsored companies that provide financing for many home mortgages. If Republicans retain control, investors can expect continued efforts to rein in the two mortgage giants. A Democratic administration would be more accommodating to Freddie Mac and Fannie Mae, created by Congress to expand homeownership.

Multinationals

The image of the United States has taken a beating overseas because of the war in Iraq. Such anti-American sentiments have extended to U.S-made products, Schubert said.

A President Kerry would likely improve the U.S. image around the world, which would be good for multinational companies such as Coca Cola Co. and Microsoft Corp.

Companies that outsource jobs overseas, however, would stand to lose tax breaks and suffer other repercussions under Kerry. He and his vice presidential choice, Sen. John Edwards of North Carolina, have decried a "two Americas" economy and blame outsourcing overseas for lost job opportunities.

Insurers

The conventional wisdom is Kerry is better for insurance companies, said Randy Lert, chief portfolio strategist with Russell Investment Group in Tacoma, Wash. That's because Republicans favor the elimination of the estate tax, which would reduce the need for families to buy big life-insurance policies to minimize estate taxes.

Also, Bush supports the creation of tax-free savings accounts, which would compete with another insurance product - annuities.

Retail

High-end retailers would benefit under Bush and could see their sales slow under Kerry, some predict. Kerry proposes repealing recent income tax rate cuts for those earning more than $200,000, which would give them less money to spend on jewelry and luxury items.

But lower- to middle-income households would keep their tax cuts. "Most of the retailers that target lower-income and middle-income individuals would benefit," said Anthony Chan, senior economist with J.P. Morgan Fleming Asset Management's offices in Ohio.

Bonds

Fixed-income investments traditionally thrive under fiscally conservative Republicans who try to keep deficits down, experts said. But that could be changing, and bonds might prosper under Kerry.

"Today, Democrats are taking a tougher line on deficits than the Republicans," Chan said. "Republicans tend to cut taxes and are not worried as much about deficits."

Taxes

Some predict that Kerry would let temporary tax cuts on capital gains and dividends expire.

"The market would not like that at all," said Chuck Carlson, chief executive for Horizon Investment Services in Hammond, Ind.

But investors should prepare for higher taxes no matter the outcome in November because of the continuing war on terrorism that both candidates support, said Steve H. Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore.

"Wars are expensive. They eventually have to be paid for regardless of the outcome of the November election," Hanke said. "The cake is baked. Taxes will be increased."

Of course, these are only predictions, and reality has a way of throwing surprises. Wall Street couldn't have predicted the Sept. 11, 2001, attacks that put the country on a much different course.

Sometimes, too, candidates can turn expectations upside down once in office.

Russell Investment's Lert said that back in the summer of 1992, "Nobody would have told you that a great bull market would have occurred during the Clinton administration."

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