A dollar in the hand, not two in the Bush

Wall Street is voting Republican. But whoever wins, investors won't find the US a happy hunting ground, says Melanie Bien

Investors looking for the next big money-making opportunity could find themselves casting an eye across the pond this week. Will the outcome of the US presidential elections have a much-needed positive effect on the country's stock market?

Whether the Democrat or Republican candidate wins does not seem to matter as much as a quick and clean result. The worst outcome would be recounts and legal challenges, warns Jim Wood-Smith, chief analyst at investment house Gerrard. This could leave the US without a president-elect for a prolonged period.

Equities are already jittery in anticipation of a possible security alert ahead of the election. The Dow Jones hit new year-lows last Monday and Tuesday, leading some doom-mongers to predict a bear market. But the Dow then went on to wrongfoot them by producing 100-point rises later in the week.

The good news for investors is that the US stock market tends to respond positively after a presidential election. It has bounced upwards in 16 out of 27 past elections, showing an average return of 9.8 per cent, according to research from investment house Gartmore.

The general consensus seems to be that if Mr Bush is re-elected, equities will fare better. "The market will almost certainly react better to a Republican win, as it always does," says Mark Beale, manager of the New Star North American fund. "This is because it expects it to mean less tax, and Republicans are always perceived to be more pro-business."

However, he doesn't believe a Kerry victory will necessarily be disastrous for investors.

"If Bush wins, there is likely to be a post-victory spike," he adds. "If Kerry wins, it may depress the market but only by a small amount, especially if Congress remains Republican."

But while popular opinion sees Bush as better for equities, history suggests otherwise. Research from Fidelity Investments indicates that since 1945, equities listed on Wall Street have fared better under Democrats than Republicans.

The average year-on-year return from the S&P 500 has been 10.7 per cent under the Democrats, compared with 7.6 per cent under the Republicans. Much of the outperformance by Democrat presidents comes in the first year of office: the average return in the first 12 months of the party's tenure is 14.3 per cent, compared with a 2.4 per cent loss under the Republicans.

"Even with all this historical evidence, it seems the current market has more of a problem with a Democrat president taking over from a Republican," says John Ross, senior portfolio strategist at Fidelity Investments. "The consensus view is that Bush will be good for stocks, while Kerry would be good for bonds, largely based on Bush's preferential tax treatment for dividends and capital gains."

But whoever is triumphant, many market watchers think there aren't many investment opportunities in US equities in the current climate.

The S&P 500 may be at "reasonable value" but it's not cheap, warns New Star's Mr Beale. "Regardless of who comes through, there are medium-term issues still to be resolved - the twin deficits [budget and trade], and the subsequent weakness in the US dollar, which are not going to disappear in a hurry."

Some 42 per cent of investors view the US as a bad bet for the next 12 months, according to Gartmore's research.

Fidelity's Mr Ross adds that investors should be wary of getting sidetracked by the election. "In the US the key to successful investing is in picking the right stocks and ensuring one's portfolio is correctly positioned, irrespective of who is in the White House," he says. "While it's good to be aware, it shouldn't cloud investment decisions."

Analysts at Standard & Poor's believe investors will have to moderate their expectations for next year, whatever happens. They recommend diversifying your US portfolio with a bias towards the large-cap and international stocks least vulnerable to volatility.

"Investors should become single-digit bulls," says Sam Stovall, chief investment strategist at S&P. "The easy money has already been made."