Transcripts

Capitol Impact 2006 - What Elections Mean To Investors

SUSIE GHARIB: With the midterm election now 19 days away, a new Harris poll shows the voters favor a divided government. By an overwhelming margin, voters prefer one party to control the White House and another to control Congress. That's the outcome that stock market analysts are also expecting. As we continue our series "capitol impact 2006," Darren Gersh looks at the election outcome scenarios and what they could mean to investors.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Call it the consensus scenario. The Iowa futures markets show a 40 percent chance of a split decision. Democrats take the House, but Republicans hold the Senate; in other words, gridlock.

THOMAS GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: Investors should expect policy drift on most of the major issues they care about through the '08 presidential election. So I think the significance of '06 is just to tell you how calm or choppy the waters are, but you're still drifting.

GERSH: That's just fine with Wall Street, where the saying is gridlock is good for stocks. But Washington analyst Brian Gardner calls that cliche overcooked. In years where one party controls the White House and both houses of Congress, Gardner says the total return for S&P 500 was 12.5 percent. In years of gridlock it was 12.1 percent.

BRIAN GARDNER, WASHINGTON ANALYST, KEEFE, BRUYETTE & WOODS: It's just not what people think it is. It's right in line with the historical trends of the market. It does as well in years of gridlock as it does in years of united government, so I don't get too pumped up about that.

GERSH: Not many people are talking about a status quo scenario, but odds makers consider it a 30 percent chance Republicans barely hang on to power in both houses of Congress.

GALLAGHER: That would be probably a short-term relief rally that the waters would be calm, not choppy. GERSH: And what about the blow-out scenario? If the voting was held today, neo-conservative political analyst Stuart Sweet says Democrats have an 80 percent chance of tying or taking the Senate. Sweet says that would be a national "no" vote on the Republican party.

STUART SWEET, PRESIDENT, CAPITOL ANALYSTS NETWORK: You'd have to say that the leading ideas of the Republican party, the Republican revolution, have seen their high water mark and are receding rapidly. What remains to be seen is what the new themes and the new ideology of the Democratic party will be.

GERSH: Brian Gardner says another election benchmark for investors is the seventh year of the Bush administration. In the seventh year of a presidential term, right before an election, markets have turned in an average increase of almost 20 percent. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.