Capitol crunch
Social Security and tax reform are on Bush's investor-friendly agenda
So slowly, perhaps, that any reform, if it happens, might get done toward the end of Bush's term--even though that traditionally is when a second-term president sees his political power ebb. But Valliere thinks the GOP could add to its Senate totals in the 2006 off-year election, perhaps moving "close to the magical 60" number, which could help cut off any Democratic filibusters on reform.
While no one underestimates the political battle that will unfold on Capitol Hill, Bush has shown a willingness to plow ahead even when the beltway punditocracy and editorial pages of the mainstream media counsel caution. One needs only to think of his decision to invade Iraq or cut taxes. Add in his desire to continue tweaking the tax code in favor of investors, and it's clear 2005 will be every bit as exciting--indeed, unnerving--for investors as the year just ended. One easy way to handicap the action on Social Security, says Gallagher, is to look at the nature of the debate. If months from now, Bush is still making the case that Social Security is a program in crisis, the odds of any major reform will probably be slim. But if the debate has progressed to determining what kind of change is needed--with the Democrats having one plan, the GOP another--that is just the sort of battle that in the past Bush has shown he can win.
Already, Bush has left a legacy for investors in the massive cuts in income tax rates he pushed through Congress in his first term. Included in those was a cut in the tax on dividends, which has spurred many companies to increase their dividends or to begin paying them for the first time. Although they are often overlooked by investors clamoring for capital appreciation, dividends provide a good deal of the overall return a stockholder receives over time. "President Bush's tax cuts are just the gift that keeps on giving," says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago, referring to the 2003 cuts in dividend and capital-gains taxes. He looks for the economy to grow at a 4.2 percent clip this year, powering the stock market to a 20 percent gain in 2005.
Which specific sectors might lead the way in 2005? Although geopolitical tensions tend to boost oil prices, Henry McVey, chief U.S. investment strategist at Morgan Stanley, sees rising energy demand as all the reason you need to buy oil-related stocks, particularly those of firms that are buying back stock and increasing dividends. He favors Schlumberger, ConocoPhillips, and Williams Cos. He also likes the capital-goods sector--especially in defense and aerospace--which he says has the power to raise prices. Among his top names are Lockheed Martin, Tyco, and Flowserve.
In general, many of today's current market trends bode well. Wall Street is looking for another year of solid economic growth with benign inflation and interest rates. That may well pan out, but as Alfred Goldman, chief market strategist at A.G. Edwards in St. Louis, notes, market history is telling him to be cautious. "The biggest problem we have is that we have a bull market that is getting long in the tooth by historical standards," Goldman says.
advertisement
