The Presidential election in the United States will take place tomorrow, November 2nd. The conventional wisdom – which we hasten to point out is neither conventional nor wise – is that the outcome of the election will matter a great deal to the markets, the economy, for stocks and bonds. Further, the expectation is for litigation-strewn contested result keeping the country guessing for weeks, if not longer.
We disagree on both points. As we have articulated in the past, the President-elect will find himself hamstrung by structural deficits, an ongoing war, fading stimulus, and a retiring baby boom generation, all within the context of a post-bubble environment. This does not leave a lot of room for aggressive policy making on the economic side.
As to the outcome of the election, the “electionomics” – our proprietary analytics of a variety of economic indicators, polls, and other data – suggest at least an outcome (at leats preliminary) will be resolved by Wednesday, November 3rd.
Where does that leave investors? If the incumbent wins, we expect the typical year-end rally to gear up, starting from 1981 on the Nasdaq, 1140 on the SPX, and 10,250 on the Dow. This may even last through the first half of 2005; After that, we perceive trouble. The conventional wisdom – Vegas betting lines, Presidential Futures, etc. – is betting that the incumbent loses; If that variant perception were to occur, we would expect a choppy nervous few weeks with a downside bias. That would provide an advantageous entry point on the long side to trade the next rally. Again, we offer the same caveat – we look for a tradable peak to occur in the 1H of 2005.
Of course, there still exists the possibility of another 2000 style debacle. The difference this time is that we’ve seen this movie before, and know how it ends: A party line vote of the Supremes, with a 5-4 resolution in favor of the incumbent. (You already know how to play that outcome).
So what are the most recent indicators saying?
We already made our “electionomics” prediction back in August, so let’s consider (tongue firmly planted in cheek) the most recent signals: Sales of Halloween masks, and Sunday’s Washington Redskins game. Halloween sales of presidential candidates’ masks, which have accurately called elections since 1980,show Bush leading, 57 to 43%.
But not so fast, say Redskin fans. Since 1933, the Skin’s final home game pre-election has a perfect record in predicting Presidential elections. When the Skins win the last pre-election home game, the incumbent party wins. When they lose, the incumbents get ousted.”
Final score yesterday?
Green Bay Packers 28, Redskins 14.
The election of your lifetime.
That’s what the vote on November 2nd vote has been called. It’s probably a fair description in many, many policy areas. The two major party nominees for President differ on a host of issues, ranging from international affairs to economic strategy to tax policy. Even on basic issues of science – stem cell research (biology), global warming (chemistry), missile-defense (physics) – there are huge distinctions between the Republican and Democratic candidates.
When it comes to the capital markets, conventional wisdom assumes that the outcome of this election will matter a great deal.
Why? There are simply far too many structural factors that will hamstring whoever assume the Office of Presidency on January 20, 2005. The post-bubble environment has problems that will likely be cured only by the passage of time. Large budget deficits will continue, as will the ongoing weakness of the dollar. The economy is likely to grow, albeit at only a very modest pace, for the foreseeable future.
Further, U.S. presidents have far less influence over the macro-environment than most believe. The United States economy is a multi-trillion dollar behemoth, and its business cycle is not readily changed by minor – or even major – course corrections.
Consider the environment the president-elect steps into: With the 2003 stimulus fading, the economic expansion has already started to slow down. The trend of the past four quarters of GDP growth is revealing: 7.4% in the third quarter of 2003, 4.2% in the fourth quarter, 4.5% in the first quarter of 2004, and 3.3% in the second quarter. The end of the softspot was supposed to be 2004′s 3rd Quarter GDP — that came in below consensus, at a (disappointing) 3.7%.
This movement is even more pronounced if we back out government spending on military and wartime explanations.
Unless another trillion-dollar stimulus package is forthcoming – and given the huge deficit, that is highly doubtful – economic growth will be in the 2.5% to 3% range.
And that’s without factoring in the impact of $50-plus-a-barrel crude.