Stocks retreated Wednesday morning as it became clear that the Democrats had picked up a significant win in the House, but we saw a reversal when Donald Rumsfeld's resignation came. The risk we're soon going to be encountering is regulatory risk.
The risk of change in various policies (most talked about one being dividend tax) by the people who are responsible for establishing regulations on business and the economy. This risk includes the risk of change in tax laws such as a possible increase in the tax burden on individuals and businesses.
With the Democratic control of the House and likely the Senate, it's virtually certain that some industries (Pharma, Oil, Hedge Funds possibly) and companies, which we discuss below, are going to face a heightened sense of regulatory risk.
It’s a little early to tell if the change in power will end the record rally that we’ve seen across the board, but I came across some speculations on what sectors will benefit from the Democratic win and which will lose. I was going to do a similar write-up but MoneyNews did it better, hence I've re-produced their speculations, with which I tend to agree:
Winner #1: Biotechs. Voters in Missouri approved a measure that will guarantee federally approved stem cell research in the state. Companies involved in stem cell research will likely get a boost as more states adopt favorable guidelines.
Winner #2: Housing? It seems strange that the beleaguered housing sector could be a beneficiary in the Democratic victory, but some analysts say that Democrats will broaden access to homeownership for Americans. And that could be good news for a sector that’s practically been beaten to within an inch of its life.
Winner #3: Alternative Energy. Democrats will likely increase funding and incentives for alternative energy producers to quell the impact of high oil prices and to throw a Band-Aid at global warming. The major winners will be ethanol, wind energy, and bio-fuels companies.
Loser #1: Big Pharma. Democrats have pledged to overhaul the current Prescription Drug Plan enacted by Republicans a couple of years ago, and that could mean a tumble in profits for traditional pharmaceutical companies.
Loser #2: Defense. Spending on the war in Iraq is likely to face cuts as the Democrats try to fix the ballooning federal deficit. The Democrats are generally more butter than guns when it comes to governing, and defense companies could take it on the chin.
Loser #3: Big Oil. Democrats, including soon-to-be Speaker of the House Nancy Pelosi, have said that they plan to roll back many tax breaks and financial incentives given to the nation’s largest energy companies. Big Oil has been raking in record profits as oil prices climbed, but now they’re likely to feel the pinch."
We did see a sell-off in Big Pharma today but to my surprise my favorite Oil ETF (NYSEARCA:OIH), more than held its ground.
Time will tell if the Democrats succeed in rolling back the tax cuts passed when the Republicans were in control. If we some major rollbacks such as the dividend tax, the economy could face further slowdown as the stimulus for growth is taken away.