View more on these topics

Vote winners

History tells us that a change of Congress in the US points to above-average performance for stocks

After months of campaigning in the US midterm elections, the Democrats retook control of the House of Representatives and the Senate for the first time since 1994.

The critical question that investors are asking themselves is, how much will this election affect the markets? In our view, the answer is probably not as much as many observers think.

Overall, the election results have not affected our broad outlook for the equity markets. We have been saying for some time that there are some risks to the markets in the form of potential earnings’ disappointments as a result of a likely slowdown in the economy but over the long term, the outlook for equities remains bright.

The history of market performance following a change in Congress during a mid-term election suggests that stocks may be in for a good 2007. Over the past 100 years, when there has been a change in control in either or both houses of Congress, the performance of the market from election day to year-end has been relatively flat. The following year, however, stocks have exhibited above-average performance.

Also, the second year of presidential terms (such as 2006) are often accompanied by a significant low point in the equity markets. From that point, stocks have tended to rally significantly in the last two years of presidential terms. In fact, since 1900, there have been only two occasions when this did not occur once during Teddy Roosevelt’s second term and once during the Great Depression.

Regarding tax policy, the Democrats will almost certainly try to push for a reduction or repeal of the 15 per cent capital gains and dividends tax policy or might be reluctant to extend it through 2010. This would be broadly negative for stocks but would be likely to benefit municipal bonds as their tax advantages would become more valuable. President Bush has, however, promised to veto any such legislation.

The energy sector may be subject to further regulation by Democratic initiatives. This may affect energy stocks negatively in general, but “green-friendly” legislation could benefit alternative energy companies. If high oil prices again become a hot political topic, the Democrats could renew calls for windfall profit taxes, which would be negative overall for the industry.

Trade has been a hotly debated political issue, with many Democrats making noise about engaging in more protectionist trade policies. We believe this would benefit some manufacturing sectors of the market but may act as a drag on economic growth and overall market performance.

Minimum wage increases are generally supported by the Democrats. Although this is a popular move with workers, it would hurt labourintensive industries such as restaurants. Such legislation would primarily benefit less wealthy Americans, which could in turn help mass-market retailers. Due to popular support, its passage is quite likely.

On the domestic front, healthcare is likely to see the biggest overhaul. In our opinion, companies running hospitals or nursing homes might benefit as Democratic plans for spending cuts tend to be more favourable toward these industries.

Additionally, the Democrats will almost certainly push for legislation that would change the Medicare Drug Benefit plan to allow for direct government price negotiation with pharmaceutical companies, which would likely be on overall negative for the industry. Such a move, however, may benefit companies that focus on generic drugs.

The Democrats are also likely to push for a reduction or an elimination of the Medicare managed care stabilisation fund, which we believe could create headline risk for managed care companies.

Bob Doll is vice-chairman and chief investment officer of equities at BlackRock MLIM


Bruce wilson

The managing director of Helm Godfrey believes in zen and the art of financial happiness, saying that sharing wisdom with clients is far more important than just selling products. Interview by Helen Pow

Abolish loopy indemnity

What an interesting article from Peter Hargreaves about killer commission. I do not agree with him that IFAs will be dead in a few years. People have been saying that for many years and it never happens. I may well be dead but from a physical, not a business, point of view. I do not […]

Adviser Fund Index

With 169 different funds from 55 fund management groups represented across the Adviser Fund Index series following the rebalancing on November 1, the three AFIs have become even more diverse.The AFI panellists did not shy away from making widespread changes to the underlying funds held within their portfolio recomm- endations at the rebalan- cing point.Financial […]

Marr wants tax relief on pension adviser fees

Former Origen chief executive Gareth Marr is lobbying the Treasury and FSA to give tax relief on fees for pension advice.Marr says the FSA’s distribution review needs to look at tackling the bias towards commission over fees caused by tax relief and VAT to create a level playing field for adviser remuneration.Marr says this occurs […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm