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Investment Implications of a Kerry Presidency

by Gregory R. Valliere , Chief Strategist, Washington Research Group, Charles Schwab & Co., Inc.


February 27, 2004

See below for important analyst certification

President Bush’s recent deep slump, combined with the stunning demise of Howard Dean’s campaign, has produced one of the most dramatic political transformations in recent memory: Bush has gone from prohibitive favorite last December to, at best, a shaky favorite now.

For financial markets, which hate uncertainty, it’s time to focus on a potential John Kerry presidency. In our view, there are two major implications:

Legislative: It’s highly unlikely, in our opinion, that a Kerry administration could push through Congress an agenda of reversing tax cuts, slashing defense spending or imposing price controls on drugs—to list just three of the potential issues that could worry the markets.

A crucial point to remember is this: it’s extremely unlikely that Democrats will capture Congress this fall, even if Kerry wins comfortably. The prospects are good Republicans will maintain or even increase their House majority, thanks largely to redistricting in Texas. And it appears Democrats could lose from one to three net Senate seats, since they hold virtually all of the vulnerable seats, mostly in the South. So fears Kerry could reverse Bush’s tax cuts are probably unfounded.

Thus it appears that on many legislative issues, a Kerry administration could preside over gridlock, much as Bill Clinton did. And for financial markets, gridlock is a benign or even positive scenario.

Regulatory: As many Washington Research Group analysts argue below, the regulatory climate could shift dramatically if Kerry wins. Here’s how:

Health
The prospect of a Kerry election likely would be considered negative by drug and biotech investors, according to WRG’s health care team.

A President Kerry would be more likely than Bush to trigger the easing of restrictions on re-importing lower-cost drugs from Canada by certifying to the safety of re-importation. A Kerry presidency would also increase chances that Congress would lift the prohibition against the government directly negotiating prices with drug makers on behalf of Medicare beneficiaries—though we still believe a Republican-controlled Congress would prevent the ban from being eliminated.

Publicly traded hospitals, nursing homes and other providers are vulnerable to future cuts in the growth of Medicare and Medicaid spending regardless of who wins the election. Both a President Kerry and a re-elected President Bush would join Congress in focusing on deficit reduction in 2005. Medicare and Medicaid account for almost 20% of the U.S. budget, and hospitals depend on the programs for 49% of their revenue while nursing homes get 62% of their revenue from government programs. Either president and a GOP-controlled Congress must cut spending in these programs to reduce rising budget deficits.

Defense sector
A President Kerry would most likely be viewed by investors as a negative—psychologically at least—for this sector, according to WRG’s Gen. David E. Baker (Ret.). Specifically, he believes many large weapon-system programs would be in jeopardy. Baker also says Kerry would probably slam the brakes on deployment of an operational missile defense system.

Technology
Spending priorities would likely change dramatically under Kerry, according to WRG’s Erik Olbeter. The open checkbook policy afforded military and intelligence agencies would likely end, reducing revenue opportunities for defense-focused IT service companies. On a potentially positive note for tech-equipment vendors, candidate Kerry has promised an increase in port and border security spending on personnel and cargo screening.

However, a Kerry presidency presents several unknowns for tech investors. President Bush’s aggressive federal job outsourcing plans are staunchly opposed by labor unions, which would likely lean heavily on a Democratic White House to slow that trend. Kerry’s position on antitrust and merger and acquisition matters is unknown, and could differ from the current administration’s attitude.

For Microsoft's antitrust worries, the U.S. suit is too far along for significant change. But the European antitrust campaign against Microsoft is just beginning, and a new administration may not advocate as emphatically for Microsoft as the Bush administration in a foreign antitrust case.

Energy
WRG’s Christine Tezak says Kerry advocates reducing the nation’s dependence on fossil fuels. He supports increasing corporate economic fuel standards, specifically to improve the fuel economy of larger sport utility vehicles, trucks and minivans. Like the Bush administration, he advocates investing in the “hydrogen” economy. Although opposed to drilling in the Arctic National Wildlife Refuge, Kerry does support a natural gas pipeline from Alaska and drilling in the Gulf of Mexico, making it clear his preference is for areas already being explored, not areas currently off limits.

Still, overall, Kerry has demonstrated an ability to weigh business interests, particularly those of small businesses—and high energy costs are clearly a concern. We’d expect his environmental advocacy to be more tempered than that of former Vice President Al Gore.

Tobacco
WRG’s Mark McMinimy reports that tobacco-control advocates would embrace a Kerry administration. The thinking is that a Kerry White House would likely be far more disposed than the Bush administration to push for passage of legislation that would provide the Food and Drug Administration with a broad mandate to regulate cigarettes and other tobacco products.

Moreover, anti-tobacco forces in Washington believe that a Kerry administration would likely be a tougher negotiator in any attempt to reach an out-of-court settlement of the Justice Department’s civil racketeering complaint against domestic cigarette makers.

Broadcast/media
Media consolidation is likely to remain the dominant media policy question for the foreseeable future. WRG’s Paul Glenchur and Paul Gallant say Kerry could well display a more moderate stance on media ownership than might be expected of a Democratic president. If Comcast and Disney pair up, it’s not hard to imagine Kerry supporting legislation or regulation aimed at offsetting the power of the emerging media oligarchy, such as more extensive public interest obligations.

A President Kerry also might counter the media elite by promoting competition in media distribution. This could include more aggressive broadband deployment by the Bells, which would be consistent with Kerry’s active support in recent years for a rural broadband deployment program. And Kerry already has ties to the media industry through his brother, a longtime lobbyist for the cable industry.

Environmental policy
A win by Kerry would likely halt the Bush administration’s effort to make environmental rules more industry friendly, according to WRG’s Debra Coy. A Kerry administration would likely take a tougher stance on enforcing and interpreting existing laws, but we wouldn’t expect Kerry to lead an effort to pass major new environmental laws.

International trade and taxation
Of all the Democratic presidential contenders, Sen. Kerry poses the least risk of a meaningful departure from a pro-trade agenda, WRG’s Joanne Thornton says. He voted in favor of the North American Free Trade Agreement and all subsequent free trade agreements during the past decade. Kerry’s campaign rhetoric, however, leaves room for a change in approach—and investor concerns would escalate if NAFTA antagonist Sen. John Edwards became Kerry’s running mate.

Kerry has promised a “top-to-bottom” review of past trade agreements, and has pledged to refrain from signing any new ones until the review is completed and to consider “necessary steps” if the existing accords are found deficient. He says all new trade agreements must have “strong” labor and environmental standards.

Kerry also advocates tougher enforcement of laws designed to remedy the effects of foreign unfair trading practices, especially against countries such as China (which he accuses of mercantilist currency manipulation), Japan and Korea. And like most lawmakers, he also advocates specific tax benefits for the beleaguered domestic manufacturing industry. We suppose that if Congress fails to enact such legislation this year, a President Kerry would continue to support such an initiative. The Bush administration, in contrast, opposes special breaks for manufacturers, favoring broader corporate tax relief instead.



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Eggplant-EX

Still, vote for Kerry...

Bush is trying to buy votes by pushing tax breaks. Please, does that make sense. We are spending soooooooooo much on the Wars and Bush wants to give tax breaks.....

He scares me, esp if he stays in Office another 4 years.

95gt

Eqq take it to R&P