Inauguration Trading: Don't Bet On A Democrat Rally

In a long Q&A, TDAmeritrade's chief market strategist Stephanie Giroux says that while Democrats in power often mean better returns historically, the general climate of increased regulation and tougher taxes percolating in Washington as the economy suffers through a recession could crimp hopes of a Democratic rally. More below:

Q. Democrats haven’t controlled Congress and the White House since 1995. What impact will a Democratic administration have on the market?

A. Since World War II the S&P 500 has done better under Democratic presidents than Republican ones, although the best-case scenario for the market is when we have a Democratic president and a Republican Congress. With Democrats holding more power, there will probably be more regulation of financial services; in the wake of last year’s meltdown, many Republicans are also in favor of heightened market oversight. That does not bode well for financial service providers in general. Government-sponsored enterprises such as Fannie Mae and Freddie Mac could benefit from an Obama administration. And while large oil companies may lose some tax advantages under the Democrats, spending on energy alternatives in the form of solar, wind and ethanol will likely grow.

On the health-care front, hospitals and generic drugs could benefit as Democrats push reform forward, but pharmaceuticals, managed care and biotechnology could face new challenges. And as Obama seeks to end the war in Iraq quickly, the U.S. could put less money into armaments, new jet-fighter programs and new Navy vessels but maintain spending on homeland security.

Higher taxes on capital gains, dividends and income are likely to be needed to help relieve the debt load of the U.S. government as it rescues the country from financial crisis. Clearly, addressing the financial crisis and improving the economy will draw President-Elect Obama’s full attention and efforts. But ultimately, our economy and financial system are not broken. Following some structural fixes to make them strong again, money will flow back into the U.S., which has always been and remains a safe haven in the world economy. We’ve all grown accustomed to instant gratification. Now we need to be patient, as time is what it will take to heal the recent wounds.

As for investing advice, Giroux remains cautious. She says the possibility of higher taxes and a "more muted" stock market mean investors should keep stable dividends in mind for stocks, and taxes in mind if they're nearing retirement. She advises aging baby boomers to consider bonds, including tax-advantaged municipals. Hope mixed with a little prudence seems the safest bet.