The Democratic victory will likely benefit some investments -- and dampen others. By Thomas M. Anderson, Contributing Editor November 8, 2006 Besides the potential for big gains in the company that makes the stamp for presidential vetoes, it's clear that several sectors stand to win or lose as a result of the dramatic remaking of the political landscape. Fast-food workers and store clerks rejoice! Odds of a hike in the federal minimum wage, now $5.15 an hour, are much better with a bigger posse of Democrats in Congress. Higher wages means more costs for fast-food chains and retailers. Will the minimum wage dent the stocks of these companies much? Well, if the stock of McDonald's (symbol MCD) is an indication, don't expect much of a blip. Mickey D's shares dipped at the outset of trading on November 8 but quickly rebounded and finished the day up by nearly 1%, closing at $42.03. Boosting the stock was a report of strong October sales. Seems that the company's strategy of offering local cuisine at its European locations, such as porridge in Britain and croissants in France, helped monthly sales rise 5.5% at restaurants opened more than a year. So, investor tension over a meatier minimum wage can't be too high if McPorridge sales can soothe their jitters. The retail sector's election reaction was equally tepid. Shares of Retail HOLDERS (RTH), which holds a basket of retailing stocks and is similar to an exchange-traded fund, barely budged for the day, closing $98.22. Advertisement That's not to say that effects of the midterm election are meaningless. Take a look at defense stocks, which suffered significant losses on the first trading day after the election. Why? A change in course in Iraq policy is more likely now that the Democrats have their hands on the gavels of power, and that could lead to a reduction in military spending. Shares of defense contractors General Dynamics (GD) and L-3 Communications (LLL) each fell more than 2%. GD closed at $70.49, and L-3 at $80.39. Congressional Democrats want to slash the interest rate on student loans, which the Republican-controlled Congress raised months ago. This brewing conflict darkens the financial forecasts for student lender SLM (SLM), the former Sallie Mae. Investors also worry that a Democratic takeover of Congress could tilt the playing field in favor of a rival program in which the government dispenses loan money directly to college financial-aid offices, cutting out such middlemen as SLM. The stock plummeted nearly 5%, to $47.21. Another prominent item on the Dem's to-do list is to allow the government's Medicare program to bargain for lower drug prices. This move may hurt pharmaceutical companies because it is seen as a form of price controls. The Dow Jones Pharmaceutical Index dropped 1.7%. But the drug business isn't monolithic. Makers of generic pharmaceuticals are expected to thrive as demand for low-cost medicines increase, says strategist Al Goldman of A.G. Edwards, the St. Louis-based brokerage. If you believe that companies with close political ties to the Democrats will benefit over the next two years, mortgage repackagers Fannie Mae (FNM) and Freddie Mac (FRE) may seem like good investments. While they controlled Congress, Republicans continually scrutinized Freddie and Fannie over accounting and ethics issues. Fannie shares rose nearly 3%, to $61.65, and Freddie gained almost 2%, to $71.23. Advertisement It also might be a little easier to be green under a Democrat-controlled Congress. Stocks of companies that invest in alternative-energy technology may do well in such a legislative environment, Goldman says. PowerShares WilderHill Clean Energy (PBW), an EFT that holds companies associated with clean energy, gained 1.4%, to $17.76. But energy companies as whole also fared well. The Energy Select Sector SPDR exchange-traded fund (XLE) fund rose 1.7%, to $57.52. Most pundits projected before election day that the Democrats would take control of the House, but many on Wall Street were surprised to see the Senate within the party's grasp. "The thing the market hates the most is uncertainty," Goldman says. He expects most stocks to drift down for a while, then rally back in December and January. By now, you have probably heard many investment seers suggest that "gridlock is good." A split government can do little harm, right? And Democrats don't have the votes to override presidential vetoes if the Republicans remain united. So the result is less regulation because fewer bills will make it into law. But that also means fewer free-trade agreements will be approved. "I am concerned about rising protectionism," Ed Yardeni, chief investment strategist at Oak Associates, a mutual fund sponsor, wrote in his morning note to investors. Turning off the tap of global trade deals could damage any company that depends on overseas goods and services. Historic returns show the stock market prefers political unity to gridlock. Since 1945, the Standard Poor's 500-stock index has performed better during periods in which one party controlled both Congress and the White House than when political power was shared. As is often the case in investing, past performance is no guarantee of future returns. "The stock market has done well in both periods of political unity and total gridlock," says SP chief investment strategist Sam Stovall. "The conclusion we draw is that Wall Street either doesn't care who is running the government, instead focusing on the Fed and fundamentals, or it dislikes disunity and would prefer to see a unified Congress -- regardless of the party." In any case, you can't expect President George Bush and presumptive Speaker of the House Nancy Pelosi to act on the basis of what's best for your portfolio. Your best bet is to resist the urge to change your investments dramatically based solely on Washington's political whims.