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SIVY ON STOCKS from money.com
November 3, 2000
Election Correction
Think twice before buying stocks based on the outcome of
next Tuesday's elections. Some groups -- particularly the
drug stocks -- may be vulnerable no matter who wins.
By Michael Sivy
Right before major elections, market pundits always try to
pick the stock sectors that will benefit if a particular
candidate wins. In reality, it's a pretty dumb exercise. The
connections between politics and the stock market are far
more complex than most people realize. Industry-specific
issues almost always trump politically driven trends, and, in
any case, those trends are usually reflected in stock prices
long before elections take place.
Still, it's worth taking a look at the historical patterns and
seeing how they might apply to the current market. Most
investors assume that a Republican president is better for
stocks than a Democratic one. That turns out to be false.
Actually, the largest U.S. stocks do about the same no
matter which party wins the White House (and that was true
even before the past eight years).
Interestingly enough, though, small-company shares tend to
do better under Democrats, while bonds perform better
under Republicans. But that traditional pattern for bonds
may not hold this time around, because the Democrats look
like the bond market's best friend. Specifically, Al Gore is
more committed than George W. Bush to paying down the
Federal debt.
The most interesting historical pattern is that divided
government is the most favorable environment for stocks. A
Democratic Congress can prevent a Republican president
from cutting taxes too fast or slashing social spending too
much. And a Republican Congress can limit a Democratic
president's tax hikes and business bashing.
In fact, when you get down to specific sectors, regulatory
trends seem to be even more important than
macroeconomic policy. In general, Democratic
administrations tend to be bad for industries such as drugs,
alcoholic beverages and tobacco, which are prime targets
for regulation.
The outcome of the election truly appears too close to call.
But I'm willing to sick my neck out: If I had to bet, I'd say that
Bush wins, the Republicans hold the Senate by one or two
seats and the Democrats take back the House. The recent
behavior of the market seems to support this view: Half of
the 10 top-performing industry groups over the past couple
of months are connected with tobacco, drugs and health-
care or defense -- all sectors that would benefit from a Bush
victory.
So does that mean you should be loading up on drug
stocks? Not necessarily. The market typically overestimates
good political news, and is then disappointed when reality
doesn't live up to expectations. The major pharmaceutical
companies are good long-term investments, no doubt, but
many have real problems other than potential regulation,
including patent expirations on many key drugs.
My own preference is to take advantage of selloffs to pick up
top-quality blue chips at depressed prices -- a strategy that
works no matter who wins next Tuesday. Right now, I'd be
looking for bargains among tech stocks. And I think there will
be plenty of time for that bargain hunting. Historically, the
stock market often performs poorly in the first year of a new
president's term. And given the current economic slowdown,
I think the selloff among the tech stocks may continue for
some months. So I've been building up big cash reserves
and waiting for offers I can't refuse.
###
Post your comments on Michael's column at:
http://www.money.com/depts/investing/sivy/index.html
To subscribe or unsubscribe to Sivy on Stocks, go to:
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