The market: "Four more years!"
The prospect of a Bush defeat has been holding back big investors, argues political analyst Greg Valliere. But does it really matter who is in the White House?
(MONEY Magazine) – One of Washington's longest winning streaks is on the line this Election Day. Greg Valliere, chief political strategist for Schwab Soundview Capital Markets, has correctly predicted every presidential election going back to Jimmy Carter's win over Gerald Ford in 1976. Four years ago, he predicted a George W. Bush win, and he did so on Memorial Day. This election, Valliere waited till July to make his call, and once again he's going with Bush. But the tea leaves also tell Valliere that W's margin over Democratic challenger John Kerry will be very narrow.
By the time you get the next issue of this magazine, we'll all know the answer. (Barring another hanging-chad crisis, that is.) But it may take a little longer to sort out the implications of the election results for our portfolios. In September, Valliere sat down with MONEY to talk about which investments have the most to gain from a second Bush term, and which ones could win if it's Kerry who dances at the next inaugural ball.
Q. How much do elections really affect the markets?
A. For a wide range of stock sectors—health care, energy, etc.—a change in regulatory policy means big changes for shareholders. And in general, you'd have to say that a Kerry presidency would be more adversarial from a regulatory standpoint.
Q. But four years ago, everyone was saying that Bush's tax cuts would be terrible for the bond market. And in 1992, everyone thought Clinton spelled doom for health-care stocks. Both calls were wrong.
A. Granted, it's hard to go back and quantify a direct correlation between an election and the performance of a specific security. For one thing, investors are savvy. They anticipate, and often you have an anticipatory move well before an election. I also think it's incomplete to look at an election's impact without taking into consideration who controls Congress. And there's a third factor as well. Not to talk myself out of a job, but there are factors that sometimes dwarf what's going on in Washington. Where we are in the economic cycle is usually far more important.
Q. In other words, a President's economic success or failure oftentimes hinges upon when he's elected?
A. Exactly. In terms of catching the economic cycle on an upswing, it's better to be lucky than good. One could argue that Bill Clinton caught the cycle at a very fortuitous time.
Q. Let's assume that Kerry stages a successful comeback. Given the likelihood Republicans will still control Congress, does that mute the potential impact?
A. Absolutely. It is a mistake to assume that Kerry would be better for bonds. He may be more vigilant about deficits and he may talk to [former Treasury Secretary] Bob Rubin, but I think the chances of him undoing all the Bush tax cuts are close to zero. The House of Representatives would become a huge roadblock for Kerry.
Q. You still think Bush will win?
A. I've got Bush with a very narrow victory. There are some people now saying that Bush is going to win comfortably, and I really reject that. I guess I can't believe that Kerry's campaign will stay this lame. I think he'll get more traction on domestic issues—particularly the economy—than on Iraq or terrorism.
Q. I'm assuming most of your institutional investor clients prefer Bush.
A. They do. I think one reason the markets were so choppy this summer is that it looked like Bush might blow what had seemed an easy re-election.
Q. The conventional wisdom is that Republicans are better for stocks. And yet stocks have usually performed better under Democrats. What gives?
A. Clinton had great stock numbers, but remember, there was gridlock then. Republicans controlled one or both of the houses for much of the Clinton administration.
Q. Are there any sectors or stocks that would benefit from a Kerry win?
A. Fannie Mae [FNM] and Freddie Mac [FRE]. They're the rare case where Kerry would probably be more gentle than Bush. The Bush people would probably try to tighten regulation of both of them. Jim Johnson [a former Fannie CEO] is one of Kerry's top advisers.
Q. You've noted that Bush's Justice Department has been slow to pursue Environmental Protection Agency findings of clean-air violations by Southern Co. (SO), Xcel Energy (XEL) and other power companies. Do you think Kerry would be tougher?
A. I do. There would be a much different climate for those companies.
Q. You think makers of generic drugs could benefit under Kerry. Why?
A. Kerry could go to his director of Medicare and say, "Look, we should curb Medicare-reimbursement rates for prescription drugs and focus more on generic drugs." That's why if by late October it looks like Kerry is closing fast, I think it would be a plus for the generics and a clear negative for the likes of Pfizer [PFE] and Eli Lilly [LLY].
Q. What should investors expect to see from a second Bush term?
A. Making the tax cuts permanent would probably be his top priority. He has a chance with the 15% capital-gains and dividend taxes. I think he has no chance making permanent the abolition of the estate tax or keeping the top income tax rate at 35%. The votes just aren't there.
Q. Do you expect more spending restraint?
A. I do. Bush has been embarrassed by conservatives who allege that he's been profligate. The juiciest target for spending cuts is Medicare-reimbursement rates. If Bush is re-elected, there is going to be an attempt at a sharply reduced rate of payment increases for HMOs, nursing homes and hospitals. I think those stocks could be vulnerable.
Q. Speaking of big targets, will Bush do anything about Social Security?
A. You'll see something from them on retirement reform. I'd expect to see another proposal for retirement savings accounts. They might propose letting people take part of the FICA tax and put that into their own account with some very plain-vanilla investment options.
Q. Out of curiosity, how does one become a political analyst for Wall Street?
A. My background is journalism—in fact a lot of people here at Schwab have a background in journalism. Journalists have good BS detectors.
Q. I think mine is going off.
A. [Laughs.] No, I'm serious. You're always being spun in this city. Everything needs to be taken with a grain of salt.