Politics and Profits

"As we go into the election, the Presidential debates will start and the typical pattern will be that both parties will try to make everyone feel good about America and optimism will go up," explains Louis Navellier . "The only concern that Wall Street has is whether Kerry would eliminate preferred treatment of taxes on dividends. My view is that he will not touch dividend relief, even though he said that he would reverse it. The House of Representatives won't let him. The state of Washington won't let him (Microsoft's big dividend will pump $75 billion into their economy and Kerry is counting on the state of Washington for votes). In addition, Kerry has Robert Rubin,  Clinton's Treasury Secretary, advising him now. Rubin cut taxes under Clinton and is expected to be Wall Street-friendly." Also concerning dividend relief, Navellier quips, "The final reason that he won't eliminate dividend relief, is that his wife gets a lot of dividends. If I were him, I wouldn't want to explain that to her!"

Lawrence Kudlow is firmly in the Republican camp, and his comments on taxes and politics appear elsewhere in this issue. Meanwhile, in what almost seems ironic, many advisors felt that political gridlock was perhaps the "best of all worlds." Steven Forbes, while strongly supporting George Bush's re-election, noted in his Opening Ceremony speech that each member of Congress should be given $10 million to simply not show up and just not do anything!

John Buckingham notes, "Many are afraid that if Kerry is elected, that the tax cuts will go away. That's possible. But even if Kerry were to win the election, I don't think that the Republicans would lose control of Congress. We would then have gridlock, which typically is a very good thing. When politicians can't do much, it seems like a good environment for the world." Jim W. Oberweis cautions that if Kerry got elected and if there were a Democratic sweep in the Congress that, "They could get carried away with huge new spending bills and then there could be risk to the market." As to how important the election is to the overall investment outlook he notes, "For the most part, the truth of the matter is that events like the election tend to have an effect on the market that last for only a few days. Over time, it generally doesn't tend to cause huge stock market swings."

Knight Kiplinger, whose commentary is featured in this issue of the Digest, notes, "In terms of the nation's economic performance over the next year or two, it won't matter very much who is elected president in November. Now I know this idea is a heresy to people who are passionate partisans. But here's the reality. Due to high budget deficits and a closely divided Congress, the ambitious plans of both Bush and Kerry would not win the majorities needed for passage. Bush could not get a consensus on major additional passages of tax cuts and Kerry couldn't get enough votes to roll back the tax cuts-even on high income households. And Kerry's new initiatives in social spending wouldn't pass Congress either due to the costs. Thus, a legislative stalemate is not altogether a bad thing."

Joe Battipaglia offers a non-partisan view: "As we know from past history, while on a very short-term basis markets may react to what they perceive as the worst attributes of one candidate or another, it often reverses itself and goes in a different direction once that candidate assumes office. History has also shown has that Democrats in the White House have been good to equities, perhaps even more so in percentage terms, than Republicans. So we have to be real circumspect with our portfolios when someone says, 'If Kerry is elected, the bull market is over,' or 'If Bush is re-elected, then happy days are here again.' We're too smart for that and I would look very carefully at the rhetoric being presented by either side. We as a nation will be the judges come November."

For an historical look at the impact of Presidential elections on the stock market, we turn to Gary Alexander, editor of SmartMoney Investor Insights . He explains, "In the last 26 election years, from 1900 to 2000, a noticeable trend emerges. There are generally three benchmarks of an election year-the early primary process of selecting candidates, the summer conventions and Election Day. Broken down this way, rather than by the traditional calendar quarters, you can see that election years have their own predictable rhythm.

1. Primary Season: January to March shows an average three-month gain of 2.3%.
2. Silent Spring: April and May shows an average two-month loss of 1%.
3. Convention Surge: June to August show an average three-month gain of 7.6%.
4. Campaign Trail: September-October shows an average two-month gain of 1.7%
5. Euphoric Aftermath: November and December shows an average 3.3%.

"This blueprint is no guarantee, of course. After all, the last election year (in 2000) was a market disaster, with the bursting of the NASDAQ bubble in the spring, then a disputed presidential election lasting five weeks, into early December. But if you look at 2004 like a more 'normal' election year, then we're due for double-digit gains in the second half. Election years tend to crescendo in the second half. Yes, this summer has been a market dud, so we've got a lot of catching up to do this month and in the rest of 2004. But the average gains from July 1 to Election Day in all 19 election years since 1928 is +7.4%, with no declines greater than 3.4%. Put all these election-year segments together, and you get a 14.5% annual gain. That implies a record Dow, near 12,000 by year-end, with the S&P 500 closing the year around 1275."