Capitol crunch
Social Security and tax reform are on Bush's investor-friendly agenda
Staying tuned to the news doesn't necessarily help you as an investor. There are always headlines that'll scare you away from stocks. Just look at last year. War. A falling dollar. Rocketing oil prices. Fears of higher inflation and interest rates. A too-close-to-call presidential election.
It's much the same as 2005 begins, but at least one uncertainty has been removed: the occupant of the White House for the next four years. Once that question was answered in November, nothing much else seemed to matter as stocks turned in a late-inning rally that helped the market score its first back-to-back bullish years since 1998-1999. The Standard & Poor's index of the 500 leading companies finished 2004 up nearly 11 percent, while many stock mutual funds (especially those with a healthy dose of small companies in their portfolios) did considerably better. "It was really a textbook election year in that the market was rangebound all the way until October," says Jeffrey Kleintop, chief investment strategist for PNC Advisors. "It really made sense to sit on the sidelines or buy and hold. In the end, stocks traded in sort of a hockey-stick pattern."
But while the new year brings some of the same uncertainties as last year, there's also a new element in the worry mix. President Bush, fresh off a decisive victory--at least compared with his 2000 win--has declared his intent to move forward with a bold domestic agenda to which investors need to pay close attention.
First and foremost is Bush's promise to tackle the issue of Social Security--described in a leaked E-mail that made the rounds of Washington last week--which portends a titanic struggle that could affect millions of Americans for the rest of the century and beyond. As part of his "ownership society," Bush favors giving workers the chance to invest a portion of their payroll taxes in private investment accounts. But this will most likely be twinned with cutbacks in promised benefits for future beneficiaries--in other words, younger workers. "It's going to be a real uphill fight," says Tom Gallagher, political analyst and managing director at research firm ISI Group.
Gallagher notes that when Franklin Roosevelt and Lyndon Johnson passed their sweeping New Deal and Great Society programs, they commanded far larger congressional majorities than the GOP's fairly slight hold on power in today's House and Senate. Not that passing Social Security was a piece of cake back in 1935. "Social Security was a very controversial program from the start," says Eric Patashnik, associate professor of politics and public policy at the University of Virginia. "Even in 1936, Republican presidential nominee Alf Landon was campaigning to repeal it."
Power shift. The market's ups or downs this year will most likely pale in financial importance compared with the outcome of the Social Security fight. And although Republicans today aren't campaigning to repeal the retirement program, they are pushing for substantive changes. In fact, the changes are so historic, they might need a somewhat historic route to passage. "As we saw during the Clinton healthcare debate, people in this country don't like radical change," says Greg Valliere, political analyst at the Stanford Washington Research Group. "So this thing is going to move very slowly."
advertisement
