No matter who wins the presidential election in November, it is unlikely American investors will be singing "Happy Days Are Here Again" for a while.
There are no quick fixes for the weak economy, the poor performance of the nation's financial institutions, the inadequacies of regulatory agencies or the need to formulate clear national policies on pressing issues such as energy.
The best that can be said is investors and Wall Street will at least know what they are dealing with. That positive for the markets often prompts a post-election "relief" rally. In addition, entering office in bad times does provide a new president with opportunity to improve things.
"The markets hate uncertainty, so as we get closer to the election, any contradictions in the candidates' policies can cause anxiety," said David Kudla, chief executive and chief investment strategist for Mainstay Capital Management in Saginaw, Mich. "We tend to see a relief rally after a presidential election, no matter what the outcome, because there finally is some certainty."
Wall Street usually favors Republicans for their pro-business stance, though this does not assure financial markets will fare better during their administrations. There are definite differences in tax policies on investments espoused by Republican Sen. John McCain and Democratic Sen. Barack Obama.
"It seems Obama has a negative slant toward the capital-gains structure, which he considers too favorable to the affluent, so the perception is that will hurt the stock market and investors," said Adam Sherman, president of Firstrust Financial Resources, Philadelphia. "Meanwhile, McCain is trying to raise the estate-tax limit and lower the estate-tax rate, but that has been proposed in Congress the last six years and never gone anywhere."
Obama wants to raise the capital-gains tax rate for those in the highest tax brackets, with no change in corporate rate. McCain would leave the capital-gains rate unchanged but cut the corporate tax rate gradually from 35 percent to 25 percent.
"In the short run, if there is a need after the election for an economic-stimulus package, McCain or Obama would pass one, and if there isn't such a need, neither would pass one," said James Paulsen, chief investment officer for Wells Capital Management in Minneapolis. "But looking at the next presidential term, major issues such as health care and energy policy must be addressed, no matter who wins."
In health care, Obama wants all Americans to have health coverage and would spend tax dollars to do it. McCain would reduce regulations to permit more choices for consumers by allowing health-care companies to sell across state lines.
In energy, both want action to deal with climate change and dependence on foreign oil. Obama wants subsidies for solar and wind energy, while McCain supports incentives for nuclear power. Republicans have been pushing for increased domestic oil and gas exploration and drilling.
"Both candidates have changed their positions over time," Kudla said. "Obama has moved closer to the middle, while McCain, who was against the tax cuts in 2003, now wants to cut taxes for corporations."
Health care is the stock sector that would be at greatest risk under an Obama presidency, Sherman said. In addition, reduced military spending under Obama would have a negative effect on companies in the defense industry, he said.
McCain is likely to let the private sector take care of itself, though there is no certainty as to how that strategy will play out in the markets, Sherman said.
"No one cares about the minutiae in this election, but rather how we are going to deal with the big problems and stem the near-depression we're moving into," he said.
Investors should realize that even if Obama wins and can make the 15 percent capital-gains tax rate go away, there would be a gradual phaseout period. That means no immediate action would be required of investors.
If confidence does somehow improve after the White House transition, investors will benefit.
"In a market comeback, it would definitely be stocks over bonds, because the sectors in crisis, such as financials and retailers, were hit hard by fears of potential horrific outcomes," Paulsen said. "The rally would probably also extend to more economically sensitive areas such as technology and industrials."
Small- and mid-capitalization stocks would triumph over large caps in a re-emergence of confidence, Paulsen said, while the overall market would shift away from defensive stock sectors.
"Whatever comes out of this election, the banking industry will be much more pure, because the bad assets will be written down and lending practices will ultimately help out the banks," Sherman said. "Coming off such a very low point, it wouldn't be that hard to trigger a relief rally in the stock market."
Tinkering, rather than taking any drastic portfolio action, is the best course for investors, experts said.
"Long-term investors with diversified portfolios should not be that concerned about the election, though it might make sense to reallocate some assets," Kudla said. "For example, we've been significantly overweighted in energy and underweighted in financials, which would be our recommendation to investors right now."Increased portfolio exposure to consumer-staple stocks and decreased exposure to consumer-discretionary stocks is another smart move in the current economy, he said.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at [email protected].