Politics shouldn't lead you into stocks

Associated Press

NEW YORK - The market may have been sighing in relief over the quick resolution of the presidential race, but investors should be careful about rushing into sectors they think might do well during the second Bush administration: All may not be as it seems.

The same fundamental issues that have been pressuring the market will remain into President Bush's second term, analysts warn. A record budget deficit makes further tax incentives for consumers unlikely, an enormous trade deficit is pressuring the U.S. dollar and energy prices remain at uncomfortably high levels. Terrorism is still a concern, corporate earnings are decelerating and interest rates are on the rise, with another hike expected when the Federal Reserve meets Wednesday.

There's no sure thing
On a sector basis, although several industries pressured by the prospect of a victory by Democrat John Kerry popped higher after the election — including pharmaceuticals and defense — their longer term outlooks remain more questionable. In addition, analysts say the belief that brokerage and financial stocks are bound to benefit from an administration push to privatize Social Security is at best premature, and at worst mistaken.

"I wouldn't be putting any money into brokerage stocks right now based on the idea they're all going to do super-well because of the privatization of Social Security," said Richard Dickson, senior market strategist at Lowry's Research Reports in Palm Beach, Fla.

Drug companies look soft
Market watchers say pharmaceutical companies have a difficult road ahead. Some face litigation due to product recalls and greater regulatory scrutiny, and with few new drugs in development and patent expirations closing in, there may be little to boost earnings over the longer term. In addition, the Bush administration may wind up taking a page from the Kerry campaign's playbook by allowing the reimportation of cheaper drugs from Canada.

Defense spending may slow
The same is true of a majority of defense stocks, another area that many people think stands to benefit in Bush's second term, said Sam Stovall, chief investment strategist with Standard & Poor's. By most calculations, these stocks are already trading above their fair market value. What typically drives defense shares higher is "not whether the president is a flag-waving hawk, but how much the defense budget goes up," Stovall said.

Now, after four years of increased military spending, with a formidable deficit looming and the president starting to focus more on social issues at home, a significant build in the defense budget seems unlikely, said Jon Kutler, CEO of Jefferies Quarterdeck, a division of Jefferies & Co. that provides investment banking services to aerospace and defense companies.

It's early in the game
In general, however, trying to predict how the market will react to presidential politics is a dangerous proposition, said Dickson, because inevitably, "the law of unintended consequences comes into play."

"Think back: Who was talking about commodity prices and commodity-based stocks in 2000? We were still talking about tech stocks. ... You just can't know what will happen," Dickson said.

A cautionary tale is available in two stocks that might have looked politically promising when Bush won his first term.

Enron had been the biggest corporate contributor to Bush's political career, and its stock was soaring. A year later, the company collapsed.

Another seemingly sure bet back then was Halliburton, the company Vice President Dick Cheney used to run. At that time its shares were trading at about $40 on the New York Stock Exchange. Two years later, the stock had dropped as low as $10, and only now has recovered to about $37.

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