A Sure Bet
It's a presidential election year. That's good news for your investment portfolio
Important vote. "The market is again showing that elections are very important to investors," says Stuart Schweitzer, global strategist at JP Morgan Fleming Asset Management. "2003 was the third year of Bush's presidential term, and the market delivered returns very typical of the third year of presidential terms since World War II. And I think 2004 will be typical of the fourth year of presidential terms with returns of around 10 to 12 percent." That kind of return would put the Dow right around its old record high of 11,723. Even more telling, the market usually strengthens as Election Day approaches. Stack notes that only five times during the past 112 years has the Dow failed to hit, or come within 5 percent of the year's high, during the three-month period surrounding a presidential election. In three of the cases where it didn't--1920, 1932, and 1960--the economy was already in a recession. And in all three of those elections, the incumbent president's political party forfeited the White House.
Such analysis hardly fits neatly into the typical Wall Street computer model. As Abby Joseph Cohen, market strategist at Goldman Sachs, puts it, "We try to stay close to the data, and it is hard to quantify the impact of an election year." Yet the current economic data seem to back up the presidential cycle indicator, hinting that 2004 will be a bullish one for stocks. Granted, equities are far from cheap after traveling such a long distance during the past year. Analysts are forecasting that the S&P 500 will post 2004 earnings in the aggregate of around $62 a share, which gives the index a forward price-earnings ratio of around 18 or so. That would be above the long-term trend of about 15, but the market has often sported such high valuations during times of low inflation.
If you were going to create a prescription for the ideal environment for stocks, it would be low inflation and the sort of economic growth economists are expecting next year. "[Federal Reserve Chairman] Alan Greenspan has his foot on the accelerator and President Bush has his foot on top of Greenspan's--and no one has his foot on the brake," says Edward Yardeni, chief investment strategist at Prudential Equity Group. Most economists are looking at GDP growth of at least 4 percent this year, although the highly regarded Conference Board projects growth will hit 5.7 percent this year, a rate that would make 2004 the best year in the past 20. That should foster continued strong earnings growth of around 10 to 12 percent, after a 17 percent increase in 2003.
"To put this in perspective," says Cohen, "we've had since March of 2003 the first phase of a bull market accompanied by vigorous profit growth. In 2004, profit growth should decelerate, but that will not be the end of the bull market, only the second phase of it." Cohen thinks the S&P will hit 1250 this year as earnings remain strong.
While much of this financial analysis looks at elections as catalysts for changes in economic policy, what about their impact on market psychology? Does the market, or, more properly, do the millions of investors whose myriad decisions create the market, care who wins the election? Certainly, some investors do. "Any threat to the Bush economic policies would be viewed as bearish," says Yardeni. "If we had not had the tax cuts or been more frugal on the spending side, we would still be in a recession."
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