The stock market went whisper quiet this week as Republicans convened in Madison Square Garden to renominate George W. Bush for president.
But don't mistake the silence for political apathy: Wall Street traders and money managers are busy trying to figure out the best way to play the 2004 election.
Think Democratic nominee John F. Kerry will beat Bush in November? Then many on Wall Street say wind-energy producers and biotechnology firms could be smart stocks to buy.
Think Bush will cruise to a second term? Then load up on pharmaceutical companies and asset-management firms. Think it doesn't really matter who wins? Chances are you're wrong, Wall Street analysts and some economists say.
"Politics directly affects the market and the economy," said Brian Knight, a Brown University economist who authored a study on how the 2000 election affected a group of 70 stocks. "Republicans are good for certain industries, and Democrats are better for others."
Knight added, "For some industries, up to 15 percent of market value seems to be affected by which party is in the White House. That's a substantial effect."
Gregory R. Valliere, chief political strategist for the nonpartisan Charles Schwab Washington Research Group, said the biggest impact of a Bush loss could be in the regulatory arena, where a President Kerry could make major policy without having to push legislation through what is likely to still be a Republican-controlled Congress next year.
Valliere noted that Kerry supports allowing consumers to purchase prescription drugs re-imported from Canada and overhauling the Medicare drug plan. "That's a concern for drug stocks," he said, citing companies such as Pfizer Inc. and Eli Lilly and Co.
A Kerry win, he said, could boost shares in Fannie Mae and Freddie Mac. Both have been under fire recently, but Kerry is viewed as friendlier to the government-sponsored mortgage-lending firms.
Kerry has also said he would spend more money to secure seaports, airports and borders, which could boost the stocks of construction and engineering firms that work in those areas, several market analysts said.
Kathleen Bostjancic, Merrill Lynch & Co. senior economist, said in a recent report for investors that a second Bush administration could be especially good for asset-management firms because of the president's support for an "ownership society," which he stressed in his acceptance speech Thursday night and could include at least partial privatization of Social Security.
Bostjancic said passing such a big change to the entitlement program might be difficult even with a GOP Congress. But she said it remains a possibility, especially if Republicans pick up congressional seats in November.
"Passage would be a positive for asset managers as it increases the flow of investment funds and need for financial advice and management," Bostjancic wrote. "However, a Democratic victory would immediately torpedo the proposals."
Jonathan Golub, investment strategist at JPMorgan Fleming Asset Management, said partial Social Security privatization would be especially good for brokerage firms with big retail asset-management arms such as Merrill Lynch and Citigroup Inc. Others, however, said fees could be capped under any privatization plan, limiting possible earnings gains for asset managers.
Golub said the biggest short-term market decision going into Election Day could be picking stocks versus bonds. He said that the market is expecting a Bush reelection and that a Kerry victory could lead to a sharp, but probably short-lived, sell-off in stocks and a move into the safety of bonds.
"My belly tells me the primary issue is going to be stocks versus bonds," Golub said. "If Kerry is a surprise winner, the market could sell off 4 or 5 percent. If that happens, I'll go in and buy stocks because I think the result actually matters a lot less [for the overall market] than many people think."
Because of the ongoing war on terrorism, both candidates are viewed as likely to support increased defense spending. Bush, however, is viewed as significantly more defense-friendly than Kerry.
Andrew Milligan, head of global strategy for Edinburgh, Scotland-based Standard Life Investments Ltd., wrote in a recent note to clients that a Kerry win could hurt earnings at big defense contractors such as Lockheed Martin Corp., Northrop Grumman Corp. and Boeing Co. because Kerry would probably try to curtail spending on a national missile defense shield and other military programs supported by Bush.
Bush is also viewed by analysts as friendlier to tobacco companies and traditional energy firms. Kerry, by contrast, is viewed as unfavorable to those industries and likely to increase government support for alternative energy producers.
In fact, Matthew Patsky, co-manager of the Winslow Green Growth Fund in Maine, is banking on a Kerry win, literally.
Patsky's about $36 million fund invests in clean energy companies, such as wind-power producers. It also invests in companies that help traditional energy producers, such as coal-fired power plants, clean up their emissions.
Patsky said that because the Bush administration has been reluctant to force power companies to dramatically reduce emissions, the fund's investments have suffered. "In the past several years we have witnessed a rollback in enforcement at the federal level that we have never seen before," he said. "Our holdings will do better if Kerry is elected."
Patsky said he expects stronger emissions enforcement under a Kerry administration, as well as strong support for alternative energy. He cited Vestas Wind Systems, a Danish firm whose shares the Green Growth fund owns, as a possible winner under a President Kerry. Other market analysts mentioned Florida Power & Light Co., a major wind producer, as a possible beneficiary under a Kerry presidency.
In addition, the Schwab Washington Research Group said in a report that a Kerry Justice Department could be much more aggressive in pursuing cases against alleged clean-air law violators. The Schwab report cited Southern Co., Reliant Energy Inc., Cinergy Corp., American Electric Power Co. and Xcel Energy Inc. as firms that could face enforcement cases under Kerry.
Patsky of the Green Growth Fund also said a Kerry administration would probably reverse limitations imposed by the Bush administration on federally funded stem-cell research, which could lift profit and stock prices at biotechnology firms such as Thermogenesis Corp., which produces equipment to store stem cells, among other things.
Of course, speculating about the impact of presidential elections on the stock market is easy. Proving a correlation has proved harder. In the 2000 campaign, however, Knight of Brown University set about to document the connection.
He picked 70 companies favored under the platforms of each major party candidate, 41 for Bush and 29 for Democratic nominee Al Gore. He found that during the campaign, Gore-favored stocks did better when Gore was viewed as the likely winner and Bush-favored stocks did better when Bush was considered the favorite.
Following the election, he found that "Bush stocks," which included drug and tobacco firms among others, were worth 3 percent more and "Gore stocks," such as alternative energy companies, were worth 6 percent less, a transfer of about $100 billion from Gore-favored to Bush-favored stocks.
"A lot of economists and the popular press focus on the effect of the economy on the election," Knight said of his study, which he hopes to repeat this year. "My paper looked at the reverse angle, [how] politics affects the economy."
Beyond individual stocks and sectors, market analysts are concerned about the election's impact on fiscal policy. But few expect radical change in the near term.
Valliere of the Schwab Washington Research Group said a GOP Congress would make it difficult for Kerry to roll back many of Bush's tax cuts, specifically the capital gains and dividend reductions beloved by Wall Street.
The market would not worry about those taxes, now capped at 15 percent, until late in a Kerry presidency, Valliere said. Both the dividend and capital gains cuts lapse in 2008 and could become a major issue in the next election cycle, possibly hurting stocks of companies that pay big dividends. Bush, for his part, may have trouble delivering on a pledge to make his tax cuts permanent in the face of a growing deficit, analysts said.
Money managers and traders are also looking at history to guide their strategy.
Overall, the market tends to perform better when an incumbent, or a member of the incumbent party, wins the White House.
According to Sam Stovall, chief investment strategist at debt rating agency Standard & Poor's, the Standard & Poor's 500-stock index has risen an average of 13 percent since 1945 in the year after an incumbent or incumbent party won the White House. By contrast, when the incumbent party lost, the S&P 500 averaged around a 3 percent decline the following year. "The market prefers a bit of certainty," Stovall said.
Contrary to popular belief, however, the market does not prefer Republicans and their low-tax policies to Democrats, Stovall said. Since 1945, the S&P 500 has risen 10.7 percent per year under Democrats and 7.6 percent under Republicans.
Stovall said part of the reason for the discrepancy could be that two-thirds of all recessions during the period occurred under Republican presidents.
And why is that? Stovall demurred. "Democrats say it's Republicans' fault, Republicans say it's because Democrats left the country in bad shape," he said.
Meanwhile, both candidates may want to keep a close eye on the market in October.
Over the past 100 years, according to the Stock Trader's Almanac, the incumbent party has never lost when the Dow Jones industrial average rose 3.3 percent or more in the final full month of the campaign. In years when the Dow dipped 0.5 percent or more in October, the incumbent party has never won.
Staff researcher Richard Drezen contributed to this report.