It's an election year, which means economic and political predictions are coming hard and fast.
Economists surveyed by The Washington Business Journal think that, on the whole, presidential candidate John McCain's policies would have a more positive impact on the stock market than those of his rival, Barack Obama. But an academic study reported by The Wall Street Journal suggests that market returns are higher when Democrats hold the highest office.
So what kinds of policies are the candidates proposing, and how might they affect your portfolio?
It's the medical bills, stupid
Health-care reform has been a mainstay of political debate for nearly 20 years, but Obama's vision could shake it up further. He has vowed to overhaul the medical insurance industry and introduce more competition for prescription drugs, including international competition.
While this would be a welcome relief to many patients, it would likely squeeze margins for large American drug companies such as Pfizer, Johnson & Johnson
To drill or not to drill, that is the question
Increasing oil prices have put the spotlight on energy, but the candidates have very different responses.
McCain supports lifting the moratorium on oil drilling in the Outer Continental Shelf in order to raise domestic production. Companies such as Transocean
Obama opposes lifting the moratorium, focusing instead on the need for renewable energy sources. His plan to double the research funding for clean energy, and require the U.S. to produce 25% of its energy from renewable resources by 2025, would be great news for companies in the solar industry such as First Solar
Read my lips
Taxes are the classic bugaboo of political debate -- and both candidates have plans for them.
McCain has pledged to cut the corporate tax rate from 35% to 25% -- which would enable companies to spend more on research and growth. He also pledged to keep the 15% tax rate for dividends and capital gains, protecting those of us with portfolios full of dividend stocks from higher taxation.
Obama is focusing his proposed tax cuts on the middle class, which he plans to pay for through a windfall-profit tax on oil companies. The profits of companies such as Chevron
The Foolish bottom line
The 2008 presidential election is likely to affect the direction and profits of American companies as well as the American family. So what should you do now?
Nothing.
No, really: nothing. We won't know who will win until the election is over, and it's impossible to predict with any accuracy which policy proposals would even be adopted by Congress, or in what form -- not to mention how a given policy would actually affect shareholder returns at a given company. There are simply too many variables.
And despite the differences in the candidates and their parties, the election may not have a significant effect on the market. Since the beginning of what has become the S&P 500, in 1923, the market has returned an average of 11% per year. Since that time, there have been 13 elections producing seven Republican and six Democratic administrations.
In other words, over time, investments in the stock market have prevailed regardless of who holds political office.
I'm not suggesting you ignore the effects that politics can have on business, especially when government policies have the potential to completely change a company's business model. But we should respond to those instances when they occur -- not when they're just a twinkle in a candidate's eye.
Instead of trying to predict the political and economic future, successful investors find well-managed companies that are changing the way the industry works -- and making them part of a well-diversified portfolio. This is the principle that led David and Tom Gardner to average returns of more than 45% in their Motley Fool Stock Advisor investment service -- compared to only 6% for equal amounts invested in the S&P 500.
If you'd like to see what companies they're recommending today -- and planning to hold for at least through the next administration, no matter who wins -- click here for a 30-day free trial. There's no obligation to subscribe.
Tristan Heinrich owns shares of Transocean. Pfizer and Johnson & Johnson are Motley Fool Income Investor recommendations. Pfizer is also an Inside Value choice. The Motley Fool has a disclosure policy.
