By Johanna Bennett
Will next week's midterm elections make any difference for
investors?
Other than the occasional threat of default or a government
shutdown, Congress has been all but irrelevant to Wall Street
recently. Political gridlock has apparently rendered legislators
incapable of legislating, and so the only important body in
Washington, from the investor's perspective, has been the Federal
Reserve. And of course there are lots of potentially market-moving
happenings beyond Janet Yellen's interest rate musings, including a
slowdown in overseas growth, the arrival of Ebola on U.S. shores,
and geopolitical crises from Ukraine to Syria.
Still, the history is promising: Stocks generally rise at a
decent clip in the months following Election Day. And this pattern
holds no matter which political party prevails, according to Bob
Doll, senior portfolio manager and chief equity strategist at
Nuveen Asset Management.
To be sure, certain industries could benefit more than others
depending on who is in control. Based on recent polls, the New York
Times as well as ESPN's FiveThirtyEight put the odds of Republicans
taking over the Senate at 66%, giving the GOP control of both
houses of Congress.
In that event, Doll says the corporate beneficiaries are likely
to be big banks, defense contractors, and oil companies. A surprise
victory by Democrats would bode well for alternative energy,
hospitals, and infrastructure plays.
Doll is well known to Barron's readers, an oft-quoted source
within the pages of the magazine and the author of several Wall
Street's Best Minds columns. Before joining Nuveen in November
2012, Doll, who now oversees a suite of nine equity funds, was the
chief equity strategist at BlackRock, appearing on television
regularly and releasing a closely followed list of predictions
every January.
Barrons.com recently interviewed Doll regarding the upcoming
elections and his stock picks. Here are excerpts from our
conversation.
Barrons.com: Polls suggest the Republicans will take the Senate,
giving them control of both houses of Congress.
Doll: Right now, I would say that it is a roll of the dice. If
the election were held today, I think the Republicans would win the
Senate. But there are too many races that remain too close to call
to be certain. In fact, we may not know who prevailed until
December because of various runoff elections.
Q: Why do the midterm elections matter? After all, there is no
guarantee that political rhetoric will become policy.
A: The midterm elections are huge for the market. During the
six-month period that followed each of the past 16 midterm
elections, the stock market has gained 16% on average. It isn't all
about which political party wins. Granted, it isn't unimportant.
What's more important is to actually have the midterm elections and
remove uncertainty from the financial markets. The markets don't
like uncertainty, and the midterm elections determine who can craft
legislation, spend money and who is best positioned for the
presidential election in two years' time.
Q: Should investors position their holdings ahead of the
election for a GOP victory?
A: If history is any guide, the important thing is to just be in
the market. Equities will bounce regardless of whether the Senate
goes Republican or stays Democrat.
Q: What industries benefit if the Republicans take the
Senate?
A: The Keystone pipeline stands a greater chance of winning
approval if the Republicans take the Senate. Conventional energy
companies are traditionally believed to benefit from a Republican
victory. The Republicans are probably a plus for the defense
industry, and some parts of the health-care sector. It is believed
that medical device manufacturers could benefit from a GOP victory
if the party can repeal the excise tax imposed on the industry to
help pay for the Affordable Care Act.
Q: What are your stock picks should the Republicans take control
of the Senate and hold on to the House of Representatives?
A: For energy, I like Valero Energy (ticker: VLO) and
Patterson-UTI Energy ( PTEN). In the aerospace and defense
industry, I like Raytheon ( RTN) and Lockheed Martin ( LMT). As for
health care, I like Humana ( HUM) and medical device maker Boston
Scientific ( BSX).
Q: The GOP is typically regarded as pro-defense spending. But
don't Democrats also buy fighter jets, tanks and bullets?
A: Yes they do, but it's a matter of shading. It isn't that
Democrats won't order tanks, but Republicans might order more of
them.
Q: With oil prices so low and OPEC digging its heels in on
maintaining production levels, how much upside is there really for
your traditional energy companies under a Republican-controlled
Congress?
A: Those issues have far more of an impact on my energy stock
selections than whether the Senate is held by the Republicans or
the Democrats. But on a nuisance level, a Republican victory will
give a boost to traditional energy stocks.
Q: What industries benefit if the Democrats hold on to the
Senate?
A: Alternative energy will get a bit more of a tailwind, no pun
intended. Some health-care companies will benefit. Also, President
Obama would love to spend more on improving, or fixing, our
nation's infrastructure.
Q: What are your stock picks for this scenario?
A: Among alternative energy names, I'd say First Solar ( FSLR)
and SolarCity ( SCTY). In health care, I like HCA ( HCA), the
biggest public hospital company in the U.S., and the health-care
information technology company Cerner ( CERN). As for
infrastructure plays, I would highlight Jacobs Engineering Group (
JEC) and Masco ( MAS).
Q: Health-care stocks have climbed more than 60% since the
Supreme Court upheld the Affordable Care Act in June 2012. What's
the likelihood the Republicans would move to repeal health-care
reform and how much upside remains for health-care stocks,
particularly drug makers?
A: The chance of a full repeal is probably zero, but pecking
away at the Affordable Care Act is another matter. If the
Republicans take the Senate, the health-care companies that make
out are those that benefit from the elimination of the medical
device excise tax or the cuts to Medicare insurers. In the event of
a Democrat victory, the Affordable Care Act stays intact as is, so
hospitals will do a bit better, as do health-care information
technology companies.
Q: What about tax reform? Democrats and Republicans have very
different ideas on the subject.
A: If the Democrats hold the Senate, don't expect much progress
on tax reform. With the two houses split, it will be hard to get
anything through Congress. If the Republicans win the Senate, then
two houses will be united under one party and may come together to
pass some tax-reform legislation. Of course, President Obama still
needs to sign the legislation into law. He has two years left in
office. Whether it is tax reform or any other legislation President
Obama may have to make some hard decisions. He will have to decide
whether he wants to get nothing accomplished or get something
done.
Q: What do you see happening with efforts to regulate Wall
Street and financial firms?
A: The ability to pass new legislation becomes more difficult if
the Republicans win the Senate. The real issue, however, remains
this: Republican or Democrat, regulators are still in the process
of "figuring out" the details regarding several prices of
legislation passed in the last few years. Dodd-Frank, for instance,
passed more than five years ago, and many parts of the law are
still being figured out. The way it gets "figured out" could differ
depending on which party runs the show. Granted, I suspect there
may not be a lot of difference between the parties. The Republicans
are likely to be a little less punitive on financials in general
and banks in particular, than the Democrats might be.
Comments? E-mail us at editors@barrons.com
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