Which Party Is Investors’ Friend?

NEW YORK —  If Wall Street were asked whether it’s better off today than it was eight years ago, the answer--amid one of history’s greatest bull markets--would be obvious.

But what will Wall Street say four years from now, and will the next president get the credit or the blame?

Given the steady decline of network TV ratings for convention coverage and the growing popularity of CNBC and other financial news outlets, it may seem that market-watching is eclipsing politics as a spectator sport.

But that doesn’t mean Wall Street doesn’t tune in when control of both the White House and the House of Representatives is up for grabs, as it is this year.

Analysts say that policy differences between Vice President Al Gore and Republican nominee George W. Bush--particularly in areas such as tax cuts, health care, the environment and antitrust--are big enough to reward investors who pay attention.

A Bush victory could benefit many energy, defense and tobacco stocks, among others, these observers say, whereas a Gore win could help certain financial services, technology and environmental firms.

Conventional wisdom has it that Wall Street favors Republican presidents, considering them less hospitable to tax increases and social welfare spending, freer on trade, grumpier about regulation, tougher on unions and generally friendlier toward business.

Surprisingly, though, the stock market has fared better under Democratic administrations, according to calculations by Wharton finance professor Jeremy J. Siegel, author of the best-selling “Stocks for the Long Run” (McGraw-Hill, 1998).

Dating to the 1888 election of Republican Benjamin Harrison, the Standard & Poor’s 500-stock index has logged average annual returns, including dividends, of 10.9% under Democratic presidents, versus 9.3% under Republicans. Siegel’s calculations for each administration began from the president’s date of election or, in cases such as Gerald R. Ford’s, of taking office.

Since 1948, when incumbent Harry S Truman upset Republican Thomas E. Dewey, the Democrats have enjoyed a greater edge, with average yearly returns of 15.5% versus 11.6% for GOP presidents. These statistics don’t include the Hoover administration, with its disastrous average annual returns of minus 20.4%, in the Republican tally.

Though the Democrats’ advantage may give them bragging rights, it probably isn’t statistically significant, Siegel acknowledged in an interview this week. There are too many other factors--foreign economic performance and control of Congress, just to name two--affecting U.S. markets to lay the credit or blame at the feet of the President.

Perhaps a trivia question will help illustrate.

Question: Who was the only 20th century president to witness improved stock market performance each year he held office?

Answer: Jimmy Carter.

Whatever the outcome of the presidential race, many investors will be rooting for an opposite result in Congress, said economist Robert E. Litan of the Brookings Institution.

“Wall Street likes divided government,” he said. “It’s the safe outcome, like hedging your bets.”

The biggest one-day postelection rally of the last century was the 2.6% jump Nov. 6, 1996. But it wasn’t President Clinton’s reelection the markets were cheering that day; rather it was that the Republicans won a tough battle to maintain control of the House and Senate.

Don’t expect all markets to react uniformly next November, particularly if Bush wins, analysts said.

Stock market players can be expected to give the Texas governor a warm welcome, but bond buyers may be more leery.

“For the bond market, there’s real anxiety toward Bush,” said Greg Valliere, chief strategist at the Schwab Washington Research Group, a unit of Charles Schwab Corp. that provides political and regulatory analysis for institutional customers.

Bond investors, who prize interest rate stability and low inflation above all else, fear that Bush’s program of large tax cuts “may overstimulate an already strong economy” and force the Federal Reserve Board to keep raising interest rates, Valliere said.

Apart from the tax cut plan, Valliere calls Bush a “Chamber of Commerce Republican” who would seek incremental reforms rather than sweeping change.

Big Tobacco might hope to settle its huge federal lawsuit on more favorable terms under a Bush administration, he said. Bush also could be expected to be less “adversarial” toward big health-care companies than his opponent.

Gore, by contrast, is a “legal activist,” tougher on antitrust and environmental regulation than Clinton and far more so than the laissez-faire Bush, in Valliere’s view. He’s less of a free-trader and more a friend of organized labor than Clinton or, certainly, Bush.

Bush, a former independent oilman, is seen as more disposed to help the energy industry obtain tax incentives for drilling and perhaps to exploit new fields in Alaska and the Gulf of Mexico. Gore, who prides himself on being an environmentalist, would probably be much less receptive to such initiatives.

“The next president may have more impact on regulation--picking the next [Securities and Exchange Commission] chief, for example--than on the legislative side,” Valliere added.

Nevertheless, if Gore wins, it could be because his stand on health care plays well at the polls, Valliere said. He might therefore consider his election a mandate to push for broad prescription drug benefits for the elderly under Medicare.

Initial reaction from drug company investors would probably range from fear to panic, as some see the Gore program as a step toward price controls on drugs.

Charles A. Gabriel Jr., senior political analyst for Prudential Securities, agreed that a sell-off in pharmaceutical stocks could well greet a Gore victory but it probably would be an overreaction, as observers say it was when Clinton took office.

No comprehensive new drug benefit is likely to be enacted without identifying a secure source of revenue to pay for it, Gabriel said. If a portion of the federal budget surplus were earmarked for drug benefits, what looks like a negative could be a positive, in the form of higher sales for drug companies without undue price restrictions, he added.

Gabriel takes a similar, slightly contrarian view of the defense industry. Defense stocks already have rallied in anticipation of a Bush victory, he said, despite weakness Wednesday. But if the economy slows and Bush manages to push through a big tax cut, it may be difficult to find the funds for a further defense buildup beyond what is already in the pipeline, Gabriel said. Moreover, he added, if defense cuts are needed, it is politically easier for a Republican Congress to make them, as defense “isn’t a manhood issue” for the GOP the way it is for the Democrats.

Gabriel has compiled lists of what he calls “Bush stocks” and “Gore stocks.”

He sees financial services as a mixed bag, with “asset gatherers” such as T. Rowe Price Associates and Alliance Capital Management potentially reaping a windfall from a Bush initiative to privatize a portion of Social Security.

On the other hand, Republicans have attacked Freddie Mac and Fannie Mae, the huge government-backed secondary mortgage firms. Those publicly traded companies would stand a better chance of prospering under Gore, Gabriel said.

Other financial services beneficiaries under Gore might be insurance firms, he said.

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Wall Street and the White House

The U.S. stock market has fared better under Democratic administrations, according to Wharton finance professor Jeremy J. Siegel, even though Republicans generally are considered friendlier to business interests. Figures show annualized total returns of the Standard & Poor’s 500 index.

Source: Jeremy J. Siegel,

Wharton School