Which Stocks Could Win, Lose in Election
Doug Kass
11/06/06 - 11:14 AM EST
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It's been a season of unusually hateful and offensive attack campaigns filled with tiresome cliches by both parties, in which every gaffe or outrageous TV ad immediately appears for all to watch on YouTube (most notably in
Tennessee,
New York,
Massachusetts and
New Jersey).
Voters are disillusioned with these campaigns, and there are increasingly anti-big-business sentiments, a hunger for change reflecting the economic anxiety facing middle-income and working-class Americans and a growing unpopularity of the war in Iraq. As a result, the general turnout tomorrow will be relatively low by historic standards and will be skewed substantially toward a better turnout among Democrats vs. Republicans.
Stated simply, the Democrats are energized, while the Republicans are not. (This is particularly true for the religious right.) In marked contrast to 2004, the lack of participation by the conservative wing of the Republican Party (after a succession of moral issues with
former Rep. Mark Foley and now
Rev. Ted Haggard) suggests that the schism between "profit and pulpit" within the GOP will be the most significant single development affecting the 2006 campaign.
Republican Party on the Defensive
The 2006 election will be a referendum on the economy and on Iraq. Inflation in food prices, tuition expenses, health insurance premiums, sky-high
home insurance premiums and the loss of American jobs (according to the AFL-CIO, 40,000 U.S. plants have been closed and about 3 million manufacturing jobs have been lost) seem likely to strike a chord with the electorate.
Then there is Iraq, which has become a foreign-policy Hurricane Katrina. Importantly, the Republicans' attempt to make Iraq only part of the terrorist issue has failed. In the six previous wartime elections, the incumbent party has lost power. The YouTube election of 2006 will be no different.
Other influences that will likely put the GOP on the defensive include the lack of progress toward energy independence, the Katrina fiasco, border insecurity and even the uncontrollable fires in the West.
A Democratic House win is nearly a foregone conclusion, with between 20 and 25 net seat adds likely. (It needs 15 net wins.) However, the potential for a Democratic "tsunami" exists in which the Democrats could pick up more than 35 net seats.
The Senate race looks closer. The Democrats need to take six additional seats, but I think they'll squeak by and gain control of the Senate with a one-vote majority. Look for key Democratic wins in Pennsylvania, Rhode Island, Ohio, Montana, Virginia and Missouri and key Republican wins in Arizona and Tennessee. Connecticut will go to Joe Lieberman, who caucuses with Democrats despite the previous election. A sweep in the House and Senate is my baseline outcome for tomorrow night.
Stock Market Ramifications
Arguably, an elevated equity market appears to be underpricing several of the aforementioned emerging political developments and themes. Therefore, it's vulnerable to the perception of new anti-business legislative initiatives that are likely subsequent to a Democratic win.
My baseline outcome of a sweep will probably result in an immediate market swoon and a great deal of economic uncertainty at a time when growth is flailing. A split of the House and Senate would have a more muted impact.
Especially vulnerable sectors in a Democratic "tsunami" would be energy (
Oil Services HOLDRs (OIH Quote)), Big Pharma (
Pharmaceutical HOLDRs (PPH Quote)) and defense (
PowerShares Aerospace & Defense (PPA Quote)).
Also, tobaccos (
Altria (MO Quote)) and high-end retailers (
Polo Ralph Lauren (RL Quote),
Tiffany (TIF Quote) and
Retail HOLDRs (RTH Quote)) will likely be pressured.
By contrast, environmental-related securities (
Johnson Controls (JCI Quote),
Clean Harbors (CLHB Quote),
Medis Technologies (MDTL Quote) and
PowerShares WilderHill Clean Energy (PBW Quote)) and government-sponsored agencies (
Freddie Mac (FRE Quote) and
Fannie Mae (FNM Quote)) will get a lift.
In either outcome (a Democratic win in either the House or Senate, or both), the net impact on the equity market doesn't appear to be positive.
