How will investors vote?

By U.S. News & World Report

How will investors affect the midterm congressional elections Nov. 7?

It is a question on the mind of many a political pundit -- and for good reason. Slightly more than half of all U.S. households own stock, either directly or through retirement accounts such as 401(k)'s and IRAs, according to the Investment Company Institute. In the early 1990s, that fraction was only about a third. And in the early 1980s, just a fifth of all households invested in stocks.

During the 2004 presidential election, about 46% of voters, according to polling by Zogby International, identified themselves as members of the investor class. And this group voted for President Bush in a landslide over Sen. John Kerry, 61% to 39%.

A diverse group

The term investor class may be nothing more than another way of describing mid-to-upper-income white men, a group that typically votes for the GOP. But investors are a far more diverse group than that. Some 91 million Americans owned mutual funds in 2005, according to the ICI. In about a quarter of fund-owning households, it's the women making the investment decisions.

"The investor class has been the great hope of Republicans," says Charles Gabriel, political analyst at the Washington research arm of Prudential Securities. "The theory was that if you turned voters into stakeholders, they would pay closer attention to what goes on in Washington and to legislation that would hurt companies." Yet Gabriel wonders how energetic they will be given that the Dow Jones Industrial Average, the market barometer that most people pay the most attention to, has only recently returned to high levels. "The GOP also has to get back right with its Southern, conservative base, and I think investor issues appeal more to the libertarian wing of the party," he explains.

Will the stock market matter?

Ironically, the stock market didn't do particularly well in the months leading up to the 2004 election. Investors opening up their third-quarter financial statements found that the S&P 500 was flat for those three months and was down for the year. Only in the final few days before the election did the market show any life at all, gaining about 2%. Yet the investor class flocked to Bush.

So how about in 2006?

A Zogby poll taken in early June -- just as the market started to rally -- showed Bush with a 41% approval rating among investors. That's not so hot, but it was better than his 36% approval rating among voters overall. Since then the market has taken off. Investors opening up their financial statements this month will see a nice "October Surprise" in them. The S&P 500 gained nearly 5% in the third quarter and is up more than 11% since early June. Plus, the Dow has rattled off record highs in its climb above the 12,000 mark.

Scandals or financial statements

All this seemed to be helping Bush and the congressional GOP -- ratings for both were moving higher -- until the Mark Foley page scandal broke. Polls since that news hit have been devastating for Republicans and joyous for Democrats. The House GOP contract at the popular TradeSports betting market has cratered. Right now, at least, it seems as though voters are thinking more about scandal headlines than financial statements.

"The economy is in very good shape right now," says David Gitlitz, chief economist at TrendMacrolytics. "Given where we have come from over the last few years, investors have every reason to be happy with what is going on."

Democrats will correctly point out that stocks have historically done better when their party has controlled the White House than when the GOP has. So why do investors continually favor Republicans? A recent study of investor voting behavior out of the business schools at Stanford University and the University of Pennsylvania offers this possible explanation: While past Democratic presidents may have pursued market-friendly policies, investors stubbornly expect future ones not to. One reason may be that the GOP tends to aggressively support more favorable treatment of capital gains and dividend income.

By contrast, Kerry vice presidential candidate John Edwards -- a possible 2008 White House contender -- has advocated raising capital-gains rates for wealthier investors.

-- By James Pethokoukis, USNews.com