Wednesday, January 20, 2010

Implications of Senator Brown of Massachusetts for Stocks

Best Headline of the Day (from The Village Voice) :

Scott Brown Wins Mass. Race, Giving GOP 41-59 Majority in the Senate


It is too early to gauge all of the implications Republican Scott Brown's victory for the Senate seat. However, in my opinion, many of the near-term implications may be negative for the health care and utility sectors of the market.

Last fall, when it seemed likely that some form of national health care would pass, health care and drug stocks soared. The thinking seemed to be that Obamacare would lead to millions of people receiving health insurance, and thereby becoming more frequent users (this was the Massachusetts experience when our state required health insurance for all).

Now, assuming that any significant legislation will be either watered-down or delayed, some of the steam may go out of the health care group, with the possible exception of the managed care group.

The utility group may also be hit. The proposed "cap-and-trade" legislation that was targeted at reducing carbon emissions would actually have wound up to be a positive for utilities, who would have realized trading profits from the carbon grants (in Britain, utility companies minted money on the scheme when cap-and-trade was imposed several years ago). Now, however, it is unlikely that any significant carbon tax proposal will pass, given the opposition of the Republicans to the whole idea.

Less clear at this time are the implications for other sectors. For example, what happens to defense stocks (will the defense budget still be pared in 2011, once the planned Afghanistan pull-out starts?). And what about the banking and financial sector (will the Treasury secretary and Fed chairman have as much freedom to operate?)?

Finally, it will be interesting to see what happens with tax policy. The looming huge fiscal deficits are the legacy of decisions by both parties, and now the bill has come due. It's easy to campaign against raising taxes, but fiscal reality is not so simple.