STOCK WATCH


If the Democrats Win: A Sector-by-Sector Look

Jeffrey R. Kosnett

A Democrat victory will affect the prospects -- or Wall Street's expectations -- for selected industries. But getting sector bets right isn't easy.



If the polls and the pundits are right, the Democrats will take over the House of Representatives next January, and they may be in control of the Senate as well. So is it time to adjust your portfolio on the basis of what the Democrats might do once they're in power? Perhaps, but playing sector politics is far easier said than done.

Consider the raising of the federal minimum wage, a Democratic priority and a measure that even some Republicans will likely support. A higher minimum would probably be seen as a negative for shares of McDonald's and other fast-food companies. But populous states such as California, Florida, Illinois, New Jersey and New York already require higher wages than the federal minimum of $5.15 per hour. Our guess is that another scare about mad-cow disease would hurt Mickey D's more than higher starting wages, which reduce employee turnover anyway.

A Democratic rout on Election Day could mean cuts in military spending. Companies such as Northrop Grumman and Oshkosh Truck could suffer if defense spending is reduced. So could their shareholders.

Democratic legislators are expected to propose a sharp reduction in student-loan interest rates, which the government boosted a few months ago. Presumably, this would make a few investors skittish about investing in SLM, the former Sallie Mae.

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And Wall Street believes, with good reason, that the Democrats want to rewrite the Medicare law so that the government could bargain for (presumably) lower drug prices with pharmaceutical manufacturers. In 2003, the drug makers persuaded the Republican-led Congress to block such a provision. Even if Congress doesn't approve such legislation soon or ever, investors in big pharma may be facing a headwind -- unless, of course, the drug makers can push fresh winners out of their labs.

Democrats are reputed to be friendly with Fannie Mae and Freddie Mac, the mortgage repackagers, both of which have been closely scrutinized by Congressional Republicans in recent years. Shares of both government-sponsored enterprises have climbed about 20% in the past three months. It's hard to make a fundamental case for the stocks, given that Fannie and Freddie make their profits from the spread between long and short interest rates and by reselling mortgages to investors in its securities. But the interest-rate spread is almost flat and mortgage volume has slowed with the weakness in housing sales. So perhaps it is politics that is driving the stocks higher.

Outside of these examples, it's hard to see where a leadership switch in Congress presents you with a do-it-now action list. Keep in mind that a Republican, George W. Bush, will remain in the White House no matter what happens on Election Day. He'll be able to wield his veto against truly obnoxious anti-business legislation, and it's hard to imagine a Democratic landslide so great as to make Congress veto-proof.

Talk of sweeping health-care reforms, such as national health insurance, or a rollback of some tax cuts may make headlines. But Washington is famous, as the song goes, more for talk than for action. Ultimately, what powers the prices of the overwhelming majority of stocks are such basics factors as earnings, new products and the ability of companies to expand to new markets.




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