How the Election Might Affect the Market

Stock markets will always react to elections in some way and this year should be no different. Fortunately, the volatility that is created, either in specific sectors or the broad market, is often overdone. This could create opportunities this coming week.

First, let’s tackle the broad market. This is fairly simple to gauge. Markets hate uncertainty, so any result at the polls on Tuesday that brings into question the political climate over the next two years should make some people nervous. However, any short-term weakness we see from this uncertainty should be expected to be fairly short term in nature. Traders always shoot first and ask questions later. Cooler heads usually prevail, and investors will jump in to correct any inefficiencies that were created by quick, emotional, and merely reactionary decision making.

As for individual sectors, the stock price movements will likely be very evident this year. Dems are talking about windfall profits taxes for big oil, as well as healthcare costs spiraling out of control. These two sectors will likely get sold if the Dems turn in a solid performance at the polls. So would contractors who have been making billions over in Iraq. Think Halliburton (HAL).

The question we need to ask ourselves, though, is how will this affect the next two years, really? Even if the Dems take both the House and Senate (I think this is quite unlikely) Bush will show us a new side of his; the veto side. Markets tend to like gridlock because it can result in compromise, which ultimately means things actually get done on Capitol Hill. However, Bush is hardly one to be receptive to compromise, so I wouldn’t hold my breath.

Overall, I think we can get some buying opportunities if certain sectors see sharp sell-offs on the heals of the election. Let’s keep an eye out for this and if anything peaks my interest, I’ll let you all know (and feel free to do the same).

And don’t forget to vote on Tuesday!

 

Bush’s Support of Free Trade Questionable

President Bush is a huge fan of markets. Rather than take meaningful action toward surging oil prices, he’ll simply let the market correct itself. With the Chinese currency pegged to the U.S. dollar, the Administration is pressuring China to let it float. Let the markets determine currency values, not governments.

I think that’s a great position actually. Markets do work, so we may as well let them. When it comes to free trade then, it’s no surprise that Bush says he supports global free trade. After all, the global economy is a perfect example of a enormous market for goods and services at work. And it does work, very well in fact.

So it’s no wonder that when the Bush Administration imposed steel tariffs in 2002, many of his supporters were irrate. The tariffs were imposed to stop cheap steel imports from flooding the U.S. market, hurting U.S. steel producers by increasing competition and lowering prices.

Dozens of U.S. steel companies had filed for Chapter 11 bankruptcy protection since the last 1990’s due to an inability to compete effectively in the global market for steel. The tariffs were lifted in 2003 after the World Trade Organization pressured the U.S. and threatened to strike them down. Bush attempted to claim that the tariffs had served their purpose for a year, and now it was time to eliminate them, but everybody knew that it was simply a huge mistake, and fortunately there was enough pressure overseas that they were overturned.

However, the Bush Administration once again is attempting to close down the U.S. to free trade. The U.S. has reimposed quotas on Chinese textile imports such as cotton patnts, shirts, and underwear. How does reinstating quotas support the notion of free trade?

U.S. retailers have been urging Bush to not to reimpose the quotas. The reason is simple, prices for the U.S. consumer will go up as a result. Inflationary pressures are the sole reason the Fed has been raising interest rates. Quotas and tarriffs will only serve to increase prices, which will result in higher interest rates and lower economic growth, here and abroad.

Economic policies like these will only hurt the U.S. economy, and as a result, prevent a new bull market from getting underway anytime soon.

Do Elections Affect the Stock Market?

The last of the three presidential debates for 2004 concluded last evening. We’ve heard plenty of election coverage, so I won’t get into much of the politics here, but one question is relevant to me and my clients. Will next month’s election (or any presidential election for that matter) affect the stock market’s future returns. And if so, how?

Much of the country has concluded during President Bush’s first term that his policy of reducing taxes on income, capital gains, and dividends has helped bring investors back to the market after many portfolios were dismantled in the first three years of the new millennium. Some have worried that the market would react negatively to a Kerry victory in November due to his desire to raise taxes for those individuals earning more than $200,000 a year.

We have also heard that academics have found that the market itself performs better under Democratic Presidents, as opposed to Republican ones. Interesting contradiction, isn’t it? Rather than listen to the pundits on television, I decided to take a look at the research myself and determine which, if any, political side is better for the stock market. Stock prices are proven to follow corporate earnings over the long term, and most won’t argue that the best predicter of company profits is economic growth. Here is what I found.

There are two sets of numbers highlighted below. The first are the most commonly used economic statistics used to measure the health of the economy; GDP growth, unemployment, inflation, growth in federal spending, the budget deficit, and the national debt. These numbers came from research completed by the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA), both non-partisan bodies that the White House and others rely on for unbiased data continually. This data is for the 40-year period from 1962 through 2001. The results are very interesting, especially if you favor the Republican political view that seeks to lower taxes and reduce government spending, as opposed to the “perceived” idea that Democrats prefer to “tax and spend.”

From 1962-2001:

GDP Growth: 3.9% (D) 2.9% (R)

Unemployment Rate: 5.1% (D) 6.8% (R)

Inflation Rate: 4.3% (D) 5.0% (R)

Growth in Federal Spending: 7.0% (D) 7.6% (R)

Growth in Federal Spending (Ex-Defense): 8.3% (D) 10.1% (R)

Yearly Budget Deficit: $36 Billion (D) $190 Billion (R)

Total Increase in the National Debt: $720 Billion (D) $3.8 Trillion (R)

(Sources: BLS & BEA)

The first point to make is that while Republicans are billed are fiscally conservative and tax reducers, over the last forty years Democratic Presidents have actually spent less and been much better balancing the U.S. budget. And while Republicans have taxed Americans less, that has not translated into better economic prosperity, as measures of inflation, GDP growth, and unemployment all have been better under Democratic leaders.

Now, that’s fine, but the real question is how this relates to stock market performance. Despite what the economic numbers above reflect, what happens to stock prices while each party is in office should be the real question. If Republicans are indeed better for the markets, then you can argue that even though favorable economic statistics sound good, they won’t really help grow your investment portfolio. Not surprisingly, though, the stock market did prefer better economic conditions, as you can see below.

Avg S&P 500 Returns: Democratic Presidents vs Republican Presidents

1926-1997: 15.1% (D) 10.7% (R)

(Source: Stock Traders Almanac)

For some, these statistics will be important when you go out and vote for our next President on November 2nd. For others, they won’t be. However, as a money manager I was curious to see if the claims made frequently in the media are actually true, so I thought I’d share my findings.