Smiles on the street
A great big huzzah for the end of election uncertainty and Bush's second-term agenda
While Wall Street likes to think that it doesn't really matter who is president, financial markets tend to embrace the re-election of a sitting commander in chief. Since 1945, stock prices have risen 12.9 percent in the year after an incumbent wins a second term, while falling 3.2 percent when he loses.
This time, the market rallied on cue. The Dow Jones industrial average went on a two-day tear, posting triple-digit gains after the election's outcome became clear. The market picked up steam following President Bush's press conference, in which he highlighted his tax and fiscal policies for the second term.
But while the markets were easily impressed, simplifying the nation's tax system, reforming Social Security, and finding a way to keep the economy growing fast enough to shrink the federal budget deficit will be hard work, to borrow a phrase Bush made famous in his first debate with Sen. John Kerry.
The market rally pushed the Dow to the 10,300 level. By contrast, the Dow was in danger of slipping below 9700 late last month. "The markets do not like uncertainty, and some uncertainty has been lifted," says Sam Stovall, chief investment strategist for Standard & Poor's. Most important, "the candidate who seems to represent business and investor interests was the one who was elected," Stovall adds.
The increase in Republican representation in Congress also fueled hopes that Bush will move to make permanent the tax cuts that are due to expire in 2008, including those affecting long-term capital gains and dividend income. That "would clearly be a big positive for stocks," says Putnam Investments economic adviser David Kelly.
Economic concerns. But while the so-called relief rally may take the Dow to 11,000 by the spring, as David Kotok, chief investment officer for Cumberland Advisors, believes is possible, the markets will eventually have to deal with the fundamentals of the economy. And there, the outcome of the election didn't change much. Certainly, inflation remains in check, and last week oil prices took a slight dip below $50 a barrel.
But the deficits brought on by Bush's spending on defense, Iraq, and homeland security, not to mention the tax cuts, are a looming problem. So are the huge trade deficit and the falling dollar, which make imported goods more expensive. Then there's Social Security, which will soon have to start paying out benefits to millions of baby boomers as they reach retirement age. "Social Security reform is one of those things that's very difficult because in the short term it's a budget buster," says Kurt Karl, chief economist at insurer Swiss Re.
In the short term, Bush must also find a way to reduce the high energy costs that threaten corporate profits, whose growth is already decelerating. Ditto for rising healthcare costs. "We have to begin dealing with these higher costs, which have increased at a double-digit pace for the past three years," says Johanna Schneider, executive director of external relations at the Business Roundtable.
The president will need to find a replacement for Federal Reserve Board Chairman Alan Greenspan, who is expected to step down when his term expires in January 2006. The markets have come to rely on Greenspan's steady hand on the monetary policy tiller. Some of the names that have been thrown around include current Fed governor Ben Bernanke and Glenn Hubbard, a former economic adviser to Bush who now serves as dean of Columbia University's business school. But Bush can take solace in an improving jobs picture, as measured by last week's report that showed 337,000 nonfarm jobs created in October. The Labor Department also sharply revised upward the number of jobs created in August and September.
All in all, it may be the sort of in-box agenda that will make the hard-fought battle against Kerry seem like a picnic. "This is an election where, if you were president, you'd almost rather somebody else won because somebody has to solve these big issues that are on the table," says Jarrett Lilien, president and chief operating officer of E*Trade Financial. Well, almost.
This story appears in the November 15, 2004 print edition of U.S. News & World Report.
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