Election Matters: Short-Term Rally and (More) Uncertainty

When stocks open on Nov. 3, expect a rapid relief rally as one of the biggest uncertainties plaguing investors lifts. The conventional wisdom is that a postelection rally will last into early 2005, as November-January is historically a strong period for shares. But just how far any presumptive rally goes will depend not only on whether President George W. Bush or Sen. John Kerry wins, but also on who controls Congress and the winner's early moves.

Conversely, another contested election will likely hit stocks as it did four years ago -- in the gut. The Dow Jones Industrial Average fell over 600 points in the aftermath of the 2000 election. Another knock-down, drag-out brawl in Florida (or in any number of other key swing states) coming amid the backdrop of higher oil prices, the war on terror and a weakening economy would be even worse this time around.

All that is to say the election matters a great deal for the markets, and especially for industries such as energy and health care that are deeply affected by government policies and programs.

Leading up to the election, the tightening of the race this month has weighed on stocks, many investors agree. A victory for either Bush or Kerry might be good for some sectors and bad for others, but with polls still virtually deadlocked, prudence dictates staying on the sidelines. Once the election is over, the theory goes, then it's time to place your bets -- meaning stocks will get a boost once the election is decided, whoever wins.

"The race remains too close to call, and for this reason we expect political rhetoric to be at a fever pitch, which could heighten volatility and keep investors on the sidelines until all the votes are in," Kurt Wolfgruber, chief investment officer at Oppenheimer Funds, recently wrote. "Regardless of the outcome, reducing the level of uncertainty will likely serve as a positive catalyst for the markets."

Even investors who don't foresee much long-term impact from the election see the uncertainty factor currently at play.

"At the moment, the election certainly seems to be giving investors yet another reason not to buy stocks, and so stock prices could conceivably remain volatile near term," said Craig Blum, managing director of U.S. equities at TCW, who does not believe elections ultimately have a "significant impact on fundamentals."

So in the short term, assuming one side can declare victory on election night or the day after, look for a quick "relief rally" next month.

Beyond that conventional outlook lies a debate over just how much of a long-term impact the next president will have on the economy or on specific sectors. It's unquestionable that President Bush's agenda has aided drugmakers such as Johnson & Johnson (JNJ) and coal producers such as Peabody Energy (BTU) and Arch Coal (ACI), as he kept government buying power out of the new Medicare drug law and eased environmental rules.