Investing in a Republican World

This year the economy, more than any other issue, was on top of the minds of most voters.

In fact, during Tuesday's election, 55 percent of voters were more concerned about candidates' views on the economy, vs. only 7 percent concerned with views on Iraq, according to The Economist.

And with Tuesday's vote to fill 435 House seats, 34 open Senate seats, and 36 governorships, legislative and fiscal policies are up for grabs. After the post-election dust settles, here is Mellody's take on what could happen to your money and the economy.

The Overall Market

Historically, when Americans think of business, they think of the Republican Party.

Traditionally, Republicans are pro-business, favoring smaller government, less spending, less regulation and lower taxes. Therefore, a Republican-controlled Congress — wherein Republicans hold the majority in both the House and the Senate — joined with a Republican administration is thought to be a potential boon for stocks.

In the first two years of the Clinton/Gore administration with a Democratic Congress, the Dow Jones Industrial Average averaged a 7.8 percent annual return. Two years later, after the Republicans regained control of Congress, the Dow averaged a 33.1 percent annual return, according to The Congress Action Newsletter.

Sectors and Stocks

Energy stocks: The Republicans are hot to pass legislation that will open the controversial Arctic National Wildlife Refuge to oil and gas exploration. Should this actually happen, energy stocks like Schlumberger, Duke Energy Corp, ExxonMobil Corp., Sunoco and ConocoPhillips could see a boost in their stock prices.

Financial services stocks: Generally speaking, Democrats are in favor of stricter corporate governance and increased regulation of the financial services, accounting and insurance industries.

However, given Republican control of Congress, financial services firms such as Goldman Sachs, Merrill Lynch and Citigroup may rebound from less draconian measures. Likewise, insurance companies like AIG, Allstate and Prudential may experience a positive bounce in their stock price because of less rigid regulations.

Defense stocks: The shift in Senate control to the Republicans increases the likelihood of a war with Iraq. Invasion of Iraq is estimated to cost $40 billion by the Bush administration. Others say the costs could be as high as $200 billion. As a means of comparison, the Gulf War cost $80 billion in today's dollars.

Accordingly, manufacturers like Lockheed Martin Corp. (maker of missiles, satellites and planes), General Dynamics (maker of warships, submarines and tanks) and Raytheon Co. (maker of radar, aircraft and missiles) are likely to benefit from increased defense spending under Republicans.

Healthcare stocks: This is a mixed bag. The White House-backed, private-sector prescription drug plan, now aligned with a Republican-controlled Congress, could benefit the branded pharmaceutical companies that support it. These companies include Pfizer (known for Viagra), Eli Lilly (known for Prozac), Wyeth (known for Advil) and Bristol Myers Squibb (known for Execedrin).

Had the Democrats prevailed, a government-run Medicare drug-benefit plan could have led to more price controls and limits on the use of patent laws by pharmaceutical companies. Such a plan would benefit generic drug companies like Mylan Laboratories (maker of generic Xanax) and Teva Pharmaceutical Industries (maker of generic Prozac).

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