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2008 Market Outlook: Election Year Impact
Author: Andrew Hart (info)
Website: http://bigtrends.com
Posted: January 3rd, 2008 at 9:55 am EST
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As the New Year begins we’re continuing our 2008 Outlook Series. Rather than wrap our 2008 forecast into one long report, we’ve decided to make this week’s TrendWatches our 2008 outlook. On Monday we looked at sectors, and yesterday’s TrendWatch focused on the indices’ 2008 performance. Today we’ll look at the political landscape and how this year’s elections could affect your trading bottom line.
Investors have begun 2008 with as much uncertainty as we ended 2007, many are still questioning the overall health of the economy and whether the US is headed for a recession. Historically, presidential elections have helped mold the economy, so as we lead into the election year it would be helpful to analyze the front runners and their economic plans. According to Stock Traders Almanac 2008 the SP500 has gained in the 7 months prior to a presidential election each time since 1950 except one. Whatever your political beliefs are you can make better trade decisions if you know what to expect and the possible reactions. We’ll look at the top two front-runners for each party and determine who they will help and hurt and you’ll be able to profit on either side of the trade.
In recent months, a new front runner has emerged for the Republicans, Mike Huckabee, and he has some groundbreaking changes he wants to make. Most notably, he wants to close the Internal Revenue Service and institute a Fair Tax. What does this mean for your trading bottom line? We’ll keep it simple here, but the Fair Tax idea would wipe out personal income tax and replace it with a national sales tax. It is estimated that the national sales tax would need to be about 23%. In an economic environment with increased inflation and recession fears this structure would denigrate consumers spending power. A weakened American consumer could steer the economic ship into treacherous waters. Market’s bottom line: Neutral with bearish bias
Hillary Clinton is the democratic frontrunner and the market might be able to predict her economic actions best. In classic fashion the market expects her policies to be historically similar to democratic administrations…I can think of one. Her major policies include changing the healthcares system (for better or worse), addressing the energy situation. It is expected to see big pharmaceutical firms take a hit on the bottom line as many did during the previous Clinton administration. Additionally, you’re more likely to see oil companies like Exxon and Valero reduce bottom line estimates due to reduced tax benefits. Market’s bottom line: Neutral
The final republican candidate to be put under the market’s scrutiny is Mitt Romney. He has an MBA from Harvard and ran his own financial firm, but will the stock market like his economic policies? Romney’s approach to a growth economy is via tax incentives. He has stated very broadly that he would lower taxes. His administration would make the current tax cuts permanent while aiming to lower the corporate tax rate. Both would give the market certainty to future tax bills and an increased bottom line. Also, capital gains tax would be lowered to zero percent for lower to moderate income investors thus enabling more taxpayers to invest. Market bottom line: Neutral with bullish bias
Our final democratic candidate is Barack Obama, who the market may be the most restless about. With such a short public record the market cannot predict or assume what effect he might have. It is expected that an Obama administration will have substantial tax increases across the board. While the tax hike or tax cut debate continues it is certain that more government regulations could hurt some corporations. For example, more strict regulation on auto emissions might debilitate Detroit; raising emissions standards too fast could be too costly for automakers. A bankrupt US automaker is bad news for the market. Market bottom line: Neutral with bearish bias
It’s never a good idea to base your trades on one occurrence and especially on politics; however, as we enter the election year it’s good to know how the market may react. For traders like you and I, observing the political landscape can be beneficial for the birds-eye-view of market direction. As we’ve seen in the past, election cycles have significant influence on market behavior. Finally, we expect all the candidates to release more information as the election nears making it easier to anticipate the market’s reaction. At least, for now, you can plan you hedges far in advance…
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Andrew Hart, Economics, Politics, Stock Market
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