Murky Waters for Stocks

As of the writing of this article (October 27, 2008), the S&P 500 Index is down a whopping 40.3% year-to-date. Although none of us has a crystal ball to tell where the market is going tomorrow, we can safely say there are many cheap stocks out there. The question is – “will they get cheaper” and “when will they not be cheap”? Unfortunately at this point, the market is clearly moving on uncertainty and fear rather than on fundamental data.

One key factor driving this downslide is lack of confidence, despite major efforts by the government. There is a lack of confidence in the financial industry as well as in government leadership right now. Hopefully the latter will be resolved next week. Although we often hear that the market prefers Republicans, primarily because of lower taxes, I believe the uncertainty of the outcome rather than the outcome itself is more critical. Regardless of who wins, the market will be focusing on where the spending will go. With very clear differences in opinion between the two presidential candidates, those differences in spending may actually make the investing landscape less murky.

For example, consider energy. It is more likely that alternative energy companies could do well under Obama since an administration under him would likely encourage more subsidies and mandates for that sector. Under a McCain administration, companies with exposure to nuclear energy could do well since he has consistently advocated nuclear fuel as a viable alternative energy source. McCain is also in favor of “clean coal” production which might be good for companies that convert coal into liquid fuel.

Another example is healthcare. An Obama victory could lead to significant changes in Medicare which could curb profits of managed care companies thereby making those companies less favored in a portfolio. On the other hand, a McCain victory could be good news for drug makers as there may likely be less pressure on curbing drug prices.

Let’s look at an example in the industrial sector. Democrats may be more likely to propose new projects to increase spending on infrastructure, such as highways and mass-transit which is good news for the transportation industry. However, should McCain be elected, defense firms could benefit significantly, particularly if more troops are to be kept in Iraq.

Of course the outcome of the markets in the near term depends on far more than who wins the White House. Getting past the uncertainty of the election is crucial but clearly the results will play a major role on what happens across multiple sectors.

In summary, most investors believe the market will eventually regain 2008 losses but it won’t happen overnight. Once confidence is restored and there is more clear direction with regards to spending, we will start to see the markets regaining ground. And that may be just around the corner.