Beyond November: Politics and Your Money
July 30, 2008 – by Richard Band
Elections do matter for your investments—and presidential elections more than most. That doesn’t mean your portfolio will go to pieces if one candidate or the other wins the November sweepstakes.
But it does mean you should consider how political developments are likely to affect your holdings. And you should do it now, before the partisan rhetoric of the campaign heats up so much that it may cloud your thinking and force hasty decisions.
The good news: Regardless of who wins the White House this time, and irrespective of which party controls the next Congress, the stock market as a whole will likely head higher by the end of 2008 and probably for most of 2009 as well.
The great driving force behind stock prices is corporate profits. By slashing interest rates promptly at the first sign of economic distress last autumn, the Federal Reserve laid the foundation for a brisk recovery in corporate earnings over the next six to eight quarters at least.
Don’t fall for the idea that a tax increase in 2009 will derail the market (see also, “Pocket More Tax Gains“). In 1992, candidate Bill Clinton explicitly promised to raise taxes on the “rich.” He kept his promise, too, yet the blue chip stock indexes posted a double-digit return during his first year in office. Why? In large part because the Fed unleashed a stimulative monetary policy to pull the nation out of a prolonged housing slump. (Sound familiar?) I expect history to repeat, with the Dow Jones Industrial Average touching 16,000 sometime next year.
The Shape of the New Landscape
Nonetheless, I don’t want you to be misled. It won’t be “days of wine and roses” for all companies and industries. Some businesses will fare better than others under the new regime in Washington. To sort out the winners and losers, though, we must first try to guess what the new political landscape will look like.
Here it’s essential to put aside your preferences and size up the odds as objectively as possible. One way to do it is to visit the Intrade Web site (www.intrade.com). Based in Ireland, Intrade allows bettors from around the world to wager real money on the U.S. elections. There’s nothing like the prospect of making money—or losing it—to give people an incentive to forecast correctly.
As you can see from the chart on this page, the Intrade market is pricing in roughly a 60/40 likelihood of a Democratic win in the presidential election. The odds (not pictured) of a Democratic sweep of both houses of Congress are running close to 90% (see also, “The Real Issues of This Election“).
“They’re wrong!” you may snort. More power to you. If you feel strongly enough, I invite you to register your convictions by placing a bet the other way. Markets can err.
But in this case, I suspect, the bettors have got a pretty accurate finger on the pulse of the American public. All the polls suggest there’s a better-than-even chance that a Democrat will take the presidency.
What’s more, even if Sen. McCain pulls off a stunning come-from-behind upset… it’s virtually certain that Democrats will control the next Congress (see also, “Election Season: A Great Time to Sell Stocks“).
At the very least, it’s only prudent to make your investment plans on the baseline assumption that these trends will prevail. Here are some of the implications:
• Companies in the healthcare industry will face heightened scrutiny. I’m not suggesting that the Democrats will nationalize healthcare or squeeze every drug maker into bankruptcy. With the government’s Medicare and Medicaid bills soaring, however, and the overall budget deficit yawning, we can expect legislation that will put pressure on the
profits of businesses in this politically sensitive sector.
The best-managed players like Johnson & Johnson (JNJ)and Eli Lilly (LLY)will find ways to survive and thrive. On the other hand, I would take advantage of market rallies over the next four to six weeks to dispose of poorly positioned companies that could suffer from a Democratic surge. Get a list of the companies on my chopping block by subscribing to Profitable Investing.
• Industries and businesses that fit well with Democratic priorities will enjoy a boost. An obvious example would be alternative energy, such as solar or wind power. I recommend an excellent “aggressive” energy play for my Profitable Investing subscribers who don’t mind a little extra risk. This specific stock is a great buy below $50.
• Higher tax rates will bring certain neglected types of investments back into favor. As I mentioned to my readers in April, the low Bush-era tax rates on dividends and long-term capital gains will automatically expire at the end of 2009 unless Congress extends them
(very unlikely). Most dividend-paying stocks have already adjusted to this prospect, at least to some degree, so it doesn’t make a lot of sense to sell now. However, the market hasn’t yet put any discernible premium on companies that use their cash flow in tax-efficient ways (buying back stock, for example, rather than paying large dividends).
At the far end of the spectrum, one of my favorite Profitable Investing Total Return Portfolio stocks has never declared a dividend. Yet, the company buys back stock whenever the share price looks attractive from an investment standpoint. In 2007, the company paid an average of $489 per share for stock it repurchased. With the shares currently quoted in the $400–$420 range, you can buy the stock yourself at a nifty discount to what the company’s sharp-penciled financial executives consider to be fair value.
In order to find out the name of this fabulous company that’s currently benefiting from insider buybacks, as well as full-disclosure to the rest of my recommendations become a Profitable Investing subscriber today.
The market is poised to profit, especially as November draws nearer. So, why miss out? Join my Profitable Investing subscribers and find out exactly which companies will see their profits soar, regardless of who takes office.
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