Taking Stock Of Your Vote

By Daniel Kadlec

Now that John Kerry has fleshed out his economic plan, investors should start thinking about a presidential portfolio. Intent on rolling back tax cuts, pushing a tough environmental agenda and slashing the budget deficit, Kerry in office would quickly change the investment backdrop for a handful of industries. So, as he and George W. Bush gain and fall in the polls between now and November, expect certain stocks to fall in and out of favor.

For traders, any pre-election stock moves will present opportunities. But even long-term investors have something at stake. A Kerry win could favor bonds over stocks for several years. That may seem counterintuitive: traditionally stocks have done better under Democrats, who generally have been willing to ignore deficits and inflation while focusing on economic growth (good for stocks). Yet that fairly describes Bush today. Meanwhile, Kerry has pledged to cut the deficit in half, which would keep interest rates down (good for bonds). Also, he would try to rescind the tax cut on stock dividends. That could cast a pall over stocks--especially those that pay a dividend.

Until a front runner emerges, it's probably too early to act. In any case, you shouldn't let politics trump fundamentals like earnings and valuation. Remember that no matter who is President, the House and Senate are likely to retain Republican majorities and will have a lot to say about what gets done. That means a Kerry win might not have as much impact as you would expect.

Still, to get an idea of which stocks might fare best under Kerry, it's useful to look at those that did well under Bill Clinton. Kerry's economic team is packed with onetime Clinton advisers, including former Deputy Treasury Secretary Roger Altman, and Kerry has made clear his affection for Clinton-era policy.

Forget about tech in this exercise. Yes, tech stocks soared under Clinton, and Kerry plans to stimulate small-business and government demand for the latest gadgets. But (thankfully) another tech bubble is unlikely. No edge there. Other Clinton winners were financial and health-care stocks, which could repeat under Kerry. Ditto Clinton-era laggards like energy and utilities.

To make a pure bet on the election, log on to the Iowa Electronic Markets www.biz.uiowa.edu/iem) which opened trading on the presidential candidates on June 1. But if you're seeking to vote in your real portfolio, here are some themes:

HEALTH CARE Kerry wants to import cheap drugs from Canada, which would hurt stocks like Pfizer, Merck and Eli Lilly. Bush opposes such imports. But hospital firms may do better with Kerry, who wants to expand Medicaid and give more patients the means to pay their bills. "Companies like HCA have been hindered by bad-debt expense," says Wendell Perkins of Johnson Family funds. "We like HCA anyway, but a Kerry win would make it more attractive."

FINANCIALS "There's a good chance that Kerry would go much easier on Fannie Mae and Freddie Mac," the giant mortgage agencies, says Tom Gallagher, analyst at research firm ISI Group. Bush wants tougher oversight, possibly helping drive up the agencies' borrowing costs. Kerry would probably leave them alone. Investment companies like T. Rowe Price and Schwab Soundview would benefit if Bush gets his way with Social Security savings accounts.

ENERGY Kerry would push for tougher emissions standards, which would hurt coal companies like Massey Energy and coal-burning utilities like Southern and FirstEnergy. "Alternative energy sources [Vesta Wind Systems, Tetra Tech] would benefit," says Greg Valliere, Washington strategist at Schwab. Bush's willingness to expand oil drilling in Alaska might help BP and Nabors Industries.

DEFENSE Kerry opposes some big-ticket items like the Lockheed Martin joint strike fighter. But Gallagher says any sell-off in Lockheed or other defense stocks related to Kerry proposals would be a buying opportunity because no matter who wins, defense spending is going up--more under Bush. You're voting not just for President but for certain kinds of stocks as well.