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History suggests a Kerry win and a Nasdaq rally
History tells me a close election will break for the challenger. And Im looking for the Nasdaq to surge past 2,500 in the aftermath. Here are 15 stocks that should benefit.
By Jon D. Markman
The stock market and presidential election have headed toward this moment like two freight trains on a manic mission to nowhere. Stocks are as flat for the year as rails across the plains of Kansas, while the two major candidates are so close they can smell each others fear.
Its instructive to note that neither the bulls nor bears of the market, nor the death-star political consultants for either party, have managed to land a debilitating blow on their opponents. To be sure, stocks and bonds have alternately soared and swooned in response to earnings or inflation threats, and the president and his challenger have traded moments of glory and shame. But they come into this week in a state of near-absolute stalemate.
There are theories as to how such deadlocks are ultimately resolved. So if youll allow me to don my swami hat for a moment, Ill forecast the results based on historical tendencies.
Believe in the trend
First, stock-market stalemates are typically resolved in the direction that prevailed prior to the impasse. In this case, the market was up a whole bunch in 2003 before the past 10 months consolidation. So price theory would suggest that the next move is higher.
How much higher? For that kind of forecast, Ill need to put a tassel on the tip of my swami hat, turn around three times and spit over my left shoulder. Turning to the appropriate section of the technical analysis voodoo manual, we learn that when dull, range-bound markets are resolved to the upside, you can pace off a target that is the same as the width of the former range. So if you use the Nasdaq as the most volatile market proxy, mark the top of the range at 2,153 in mid-January and the bottom of the range at 1,750 in mid-August. The difference is 403. Add 403 to 2,153 and you get 2,556. So there is your target a gain of about 30% from Monday. Nasdaq 2,556 was last seen in February 2001 -- seven months before the market crashed under 9/11 terrorist attacks.
Stalemate: Good for stocks
If that happens, it would be a 30% advance -- which is a lot. But its interesting to note that the last time the economy and political scene were aligned in a way similar to the present, the market coincidentally did move up around 30%.
That was January to July 1995. The economy was in a funk, allowing Republicans to capture both houses of Congress in mid-term elections. President Clintons legislative agenda was thus stymied by Newt Gingrich and his budget-slashing Contract With America. If Sen. John Kerry were to win the election this week, a similar split between the executive and legislative branches of government would likely ensue. And such splits have tended, historically, to be a positive for stocks because they forestall any radical changes in the status quo. Stalemate gives investors what they want but rarely obtain: a modest measure of predictability.
Now what about the election? I tipped my hand there a moment ago, but, if you use historical precedent, again, it seems that Kerry has the upper hand. Modern political polling theory suggests that when two candidates are in a dead heat, and there is a substantial number of undecided voters on the sidelines, victory goes to the challenger. Studies show that undecideds break toward the challenger 2 to 1. If that happens in this election, Kerry is on track to win 280 electoral votes -- or just barely enough to declare victory on Wednesday morning.
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How will the market react? If you put the two ideas together and you postulate that the election runs fairly clean, with few of the imbroglios encountered four years ago, then you can foresee a positive reaction from investors for the new Democratic administration.
At least a contented yawn if not a big move up
The dress rehearsal for this event would be the markets reaction after Kerry was declared by the political pundit class to have won the first debate at the University of Miami on Sept. 30. The next day, stocks soared; the Dow Jones Industrial Average ($INDU) jumped 112 points. That is what I think will occur on Wednesday. If not a big move up, at least a contented yawn. To put a number on it, Ill guess the Dow advances 80 points and the Nasdaq rises 20 points.
As for individual sectors and stocks that might succeed in this event, I would focus on relatively volatile but fundamentally sound companies in the battered technology, retail and homebuilder groups. Transportation stocks could also continue to work, as well as market-sensitive stocks like the regional brokerages.
Is it possible that the market predicted this result? Maybe. In my Sept. 29 column, Play local stocks for a Bush or Kerry win, I offered two indexes of stocks -- each mapped to groups whose rise or fall might offer clues to investors who were voting with their money. In the month since, I can now report that the Kerry portfolio has beaten the Bush portfolio by a slim margin: +3.7% for Kerry, vs. +2.6% for Bush.
Through Friday, the big movers for Kerry were Starbucks (SBUX, news, msgs), +16%; Costco (COST, news, msgs), +15%; and Nordstrom (JWN, news, msgs), +12%. Big movers for Bush were biotech Dendreon (DNDN, news, msgs), +21%; defense manufacturer Esterline Technologies (ESL, news, msgs), +4%; and utility Puget Energy (PSD, news, msgs), +3%.
For a list of stocks that could succeed in the event that Kerry does move into the White House but is saddled with a recalcitrant opposition down the street in the Capitol, we turn now to the ineffable MSN StockScouter rating system. Here are 15 that its algorithmic trolls sense could have the upper hand over the next six months.
| 15 stocks for the next six months | | Company | StockScouter rating | Last price | Market cap | Industry | | Autodesk (ADSK, news, msgs) | 10 | $52.75 | $6 billion | Technical software | | Cognizant Technology Solutions (CTSH, news, msgs) | 10 | $34.00 | $4 billion | Business software | | eBay (EBAY, news, msgs) | 10 | $97.63 | $64 billion | Internet software | | Hutchinson Technology (HTCH, news, msgs) | 10 | $33.61 | $876 million | Data storage devices | | Investors Financial Services (IFIN, news, msgs) | 10 | $38.49 | $2.5 billion | Asset management | | Intuitive Surgical (ISRG, news, msgs) | 10 | $29.18 | $982 million | Medical appliances | | KLA-Tencor (KLAC, news, msgs) | 10 | $45.53 | $8.9 billion | Semiconductors | | M.D.C. Holdings (MDC, news, msgs) | 10 | $76.75 | $2.5 billion | Home building | | Microsemi (MSCC, news, msgs) | 10 | $15.54 | $925 million | Semiconductors | | MicroStrategy (MSTR, news, msgs) | 10 | $59.98 | $960 million | Business software | | OMI (OMM, news, msgs) | 10 | $17.95 | $1.7 billion | Shipping | | Overseas Shipholding Group (OSG, news, msgs) | 10 | $56.95 | $2.2 billion | Shipping | | W Holding Co. (WHI, news, msgs) | 10 | $19.99 | $2.1 billion | Savings & loans | | Catellus Development - REIT (CDX, news, msgs) | 9 | $28.84 | $2.9 billion | Industrial | | Gabelli Asset Management (GBL, news, msgs) | 9 | $46.10 | $1.3 billion | Investment brokerage |
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Ill be back on Tuesday night with real-time assessment of these predicted outcomes at our new MSN Money blog. Click this link and bookmark it now, then return around 6 p.m. PT for my first update.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in the following stocks mentioned: Starbucks.
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