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).

Last year, the average brand-name drug cost more than $72 per prescription while the average price for generic drugs was less than $17. While generics leave more money in the consumer's pockets and make health care more affordable, they hurt drug-company profits and are ultimately curtail drug-company research and development spending. (It costs $800 million to develop a new drug and bring it to market.)

Your Wallet

Taxes: Now that the Republicans are in control of Congress, look for President Bush to make his 2001 $1.35 trillion tax cut permanent. Lower taxes generally are thought to boost stock prices and the economy because consumers use the extra money to invest or spend more.

In addition to reducing tax rates, under Bush's tax plan, the child-credit allowance was doubled, the death tax was repealed and contribution allowances were increased for retirement accounts like 401(k) plans and IRAs.

Your Retirement

Social Security Privatization: Between 2010 and 2030, the number of elderly Americans will rise by 82 percent, while the working-age population will grow by just 5 percent. This equates to a severe strain on the resources for Social Security and a wide disparity between the money taken out and the money coming in. In fact, it is predicted Social Security could run out of money altogether by 2038.

Look for privatization to become a front-burner issue. This move would boost stocks because money invested in stock and mutual-fund investments would increase.

The Federal Reserve

The Lowered Rate: Unrelated to the Republican victory, the nonpartisan Federal Reserve Bank cut the federal funds rate for the first time in 2002 to 1.25 percent, a new 40-year low. The Fed cuts short-term interest rates to lower the cost of borrowing and stimulate the economy, and it raises rates to slow the economy down and fight inflation.

What does this rate cut mean for you? This low-interest rate environment remains an excellent time to refinance your existing mortgage — which may mean more money in your wallet.

Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, Ariel Mutual Ariel associates Matthew Yale and Aimee Daley contributed to this report.