Many investors are breathing a sigh of relief that the U.S. Presidential contest is finally over. Now what?
by Ben Steverman
Investors will be spending the morning after the election of a new U.S. President figuring out what it means for their investments and the stock market as a whole. (At just after 11 p.m. ET on Nov. 4, media outlets projected that Barack Obama would be elected the 44th U.S. President.)
Some minimize the importance of the man in the White House, putting more emphasis on the state of the U.S. economy and the direction of the world credit crisis. However, many market observers say the U.S.'s shifting political climate could have a significant impact. A range of reactions are likely from investors, they say:
First, relief.
Arizona Senator John McCain and Illinois Senator Barack Obama have been running for President for more than a year and a half.
"It's been a long, grueling campaign," says John Merrill, chief investment officer at Tanglewood Wealth Management. "At this point, there will be a sense of relief that at least the campaign is behind us."
UNCERTAINTY WON'T WIN A POPULAR VOTE
It's a truism that the market hates uncertainty. Investors like to know what's coming, but the recession, the election, and financial crisis have only added to the mysteries. "We don't know how bad it's going to get," says Bill Stone, chief investment strategist at PNC Wealth Management. In fact, "you [can] make a never-ending list of what we don't know" as investors.
The end of the campaign—and especially a decisive end to the election—takes one major source of uncertainty off the table.
A rallying stock market is a common phenomenon in the last few months of Presidential election years, says Federated Investors (FII) Chief Equity Market Strategist Phil Orlando. It almost doesn't matter who wins: Investors are relieved just to know the result.
"The market, which hates uncertainty, now has a sense of finality," Orlando says. Investors "know what to expect" and can price it in.
A DASH OF OPTIMISM
The second reaction to a new U.S. President from the stock market is likely to be a bit of optimism.
Not too much optimism, perhaps, as the U.S. economy heads for a potentially deep recession and the world continues to battle with credit troubles and market turmoil.
As a so-called "lame duck" on his way out of office, President George W. Bush's political power has waned. That was demonstrated with the failure of the first House of Representatives vote on the $700 billion financial bailout package, Stone says.
During tough times, "you'd rather have strong leadership," Merrill says. The new President, whoever he is, will be armed with a mandate from the electorate, and he can pick a new team to help tackle the financial crisis and push the economy toward recovery. "Now, they can get busy," Merrill says.
The stock market is expecting a lightning-quick transition (BusinessWeek.com, 11/4/08) from the old to the new Administrations.
FOCUSING ON THE CABINET
Dan Genter, president of RNC Genter, says early Cabinet picks by the new President will be closely watched by investors, especially key jobs like Secretary of the Treasury and Secretary of State. If a new President can draft the "best talent," "that's a real positive," but investors will be disappointed with any evidence of "cronyism and paybacks," he says.
Federal Reserve Chairman Ben Bernanke will remain in his job no matter who wins the election. But the U.S. will need a new Treasury Secretary to replace Henry Paulson (unless the new President decides to keep him on).
A well-respected Treasury nominee "would give the markets a lot of confidence," Orlando says. He also hopes Congress, the President-Elect, and Bush can agree on another package to stimulate the economy even before the next President takes office. If so, the bill's passage might lift confidence before a holiday retail season that is expected to be the worst in a quarter-century, Orlando says.
Finally, assuming the President-Elect can reassure the market with a few early decisions, the investment community is then likely to shift to a patient, wait-and-see approach to the new President and his policies.
PRESIDENTIAL PORTFOLIOS
During the election, many analysts produced "McCain portfolios" and "Obama portfolios"—lists of stocks that might benefit or be hurt if either were elected. Thus, the thinking went, a McCain victory might help defense firms, energy companies, and health-care firms. An Obama victory would hurt those companies, but help alternative energy stocks.
Many professional investors, however, say so many factors influence stock prices in the long run that these recommendations aren't very helpful. By buying or selling stocks based on the election alone, "you're adding risk without any increasing return," says Dan Crimmins, chief executive and founder of DPC Wealth Management.
Chief executives and stockholders often approve of the Republican Party's philosophy favoring low taxes and light regulations. But political reality is rarely that simple. For right-leaning investors, "Democrats are never as bad as you envision, and Republicans aren't as good as you hope," Stone says.
Plus, stock prices already reflect the market's best guess of the new President's impact. For example, health-care stocks have suffered ever since the Democrats regained Congress two years ago, making health-care reform more likely.
If you think you know what the next President will do to affect health care, defense, energy, or another sector, it's a good bet that others in the market know as well, Crimmins says. "It's not unknown to the world what the beliefs are" of McCain and Obama.
INVESTORS SHOULD BE PATIENT
Still, it might take time for the next President's true priorities to emerge, along with solid policy details. That's why investors may need some patience.
The economy and financial crisis are likely to dominate the new President's agenda, crowding out earlier priorities and campaign promises, Merrill says. "His hands are going to be a bit tied," Stone says. "It's going to be hard to do a whole lot [in the short term] other than deal with the crisis."
A new President doesn't erase the worries about a serious economic downturn and a spreading financial crisis. But the end of the 2008 election does provide a bit more hope that solutions to these problems may be on the way.
Source: BusinessWeek.com, 2008