"Politics is a strife of interests masquerading as a contest of principles," said Ambrose Bierce. Indeed, while there are many reasons to question the true motivation behind political decision-making, as investors we can judge the political winds and their potential influence on our portfolios. Here, some top advisors assess the impact of a Republican majority on specific industries and the general investment markets for the year ahead.
Says Stephen Leeb in Personal Finance, "The most immediate impact of the election will be stimulus, and a lot of it. The first priority of any government is to get re-elected. And every Presidential re-election has ultimately turned on the economy. The upshot of higher government spending is strong economic growth. That will prove a major plus for stocks most leveraged to growth, such as energy and precious metals. In contrast, this new political paradigm will ultimately hurt bonds, as the federal deficit explodes and downward pressure mounts on the US dollar. And ultimately, robust spending combined with higher energy prices will revive the old demon of inflation.
"Every victorious political party rewards its contributors. And with elections more expensive than ever, the impact is likely to be pronounced. High on the list of Republican causes is the goal of reducing and even eliminating regulation in key indsutries. Defense companies would have benefited no matter who won the election. Pharmaceutical companies gave heavily to the victors, and should see less heat. So should other health care providers. Energy companies have already outperformed the market during the Bush administration's first two years. And they will continue to enjoy an edge even if the energy bill fails to clear Congress, as the administration relaxes more rules on drilling for oil and gas and very likely calls off the dogs on the battered energy merchants. There will also be increased efforts to cap jury awards, especially in medical malpractice suits and asbestos cases. And almost certainly, legislation will be proposed to increase the number of Americans covered by medical insurance. These initiatives will provide a boost to insurance companies and hospital management firms."
Louis Navellier, editor of MPT Review and the Blue Chip Growth Letter, says, "There are a lot of theories about what the Republican sweep of the mid-term elections truly means. To me, it's not that complicated. Either the Republicans are going to fix the economy or there will be another leadership change two years from now. It's now time to put up or shut up. The Democrats will no longer be able to block stock option reform or additional tax cuts. The Bush administration had previously shelved plans to stimulate the economy, but with new Senate leadership, we may see a resurrection of these ideas. This includes a capital gains tax cut, increasing the amount of capital losses that investors can write off without offsetting gains, increasing contributions to IRAs and 401(k)s and eliminating the double-taxation of dividends. Any dividend tax relief would be a huge boon for the stock market. Meanwhile, everything from a national sales tax to a flat tax is now being studied."
Mark Skousen, editor of Forecasts & Strategies, notes, "The Republicans will work to make the tax cuts permanent and will fight to cut the long-term capital gains tax from 20% to 15%. They will attempt to increase the annual carry-forward on capital losses from $3,000 to $20,000. They will expand IRAs, 401(k) and other pension contributions, and may even privatize part of Social Security. The Republicans also aim to abolish the federal estate tax. Overall, lower income tax rates, coupled with lower capital gains rates and expanded retirement investing, means more saving and investing—and therefore more money going into the stock market. While no one can predict the short-term moves in the market, the Republican legislation should be positive for the market's long-term trend."
