Now we wait for investors' vote
The 1988 presidential election has passed into history. ``Now we're back into the real world,'' says Larry Wachtel, a market analyst with Prudential-Bache Securities Inc. ``There is nothing for the moment that any politician can do to alter the economy. Whatever was there on Monday [before last week's election] was there on Wednesday.'' This includes, he says, the trade deficit, the budget deficit, and the recently falling dollar.
In other words, he says, the election of Vice-President George Bush is not by itself going to send the stock market into an upward overdrive, as popular as his candidacy was in financial circles.
In fact, Mr. Wachtel notes, the market may even start to fall somewhat on a short-term basis based on its earlier discounting of a Bush victory. For the week ending Nov. 11, the Dow Jones industrial averaged closed down 78.77, at 2,067.03.
In the past, market losses have usually been modest in the transition between a presidential election and Inauguration Day. It is more important what happens in the first year of a new term. That is when a president has to spell out an agenda, and the White House and Congress have to reach agreement on a new budget. That discussion takes on special importance this year, given Mr. Bush's insistence on no new taxes to help allay the budget deficit, as well as slight Democratic gains in Congress.
Going back to 1968, the market has shown a loss in the first year after four of the five presidential elections, says James Stack, editor and publisher of InvesTech, a newsletter published in Whitefish, Mont. Only in the election of 1984, when President Reagan was re-elected, did the market register a clear gain - of about 26 points. Then, of course, the bull market that began in 1982 was still under way.
``As we enter the post-election period, the market is on a fragile footing from a technical basis,'' Mr. Stack says. ``The market's breadth is deteriorating. The Dow is holding on the 2,100 level. But fewer stocks are reaching highs. These are indications of a high-risk market.'' Stack believes the ``upside potential for this market is very limited, at around 2,250 to 2,300 points.''
Not everyone would agree with that assessment. ``We have a bullish scenario going into next year,'' says Jeffrey M. Applegate, chief investment strategist at Tucker, Anthony & R.L. Day Inc. For the moment, Mr. Applegate says, Tucker, Anthony's asset allocation remains underweighted in stocks as ``central banks continue to tighten and 1989 earnings expectations'' seem unrealistic.
``The policy of the Federal Reserve Board is to engineer a growth slowdown, but not a recession,'' Applegate says. But that implies a slow and steady economy.
``We've been recommending that investors take profits in some consumer staple cyclicals'' and put the money to work in some industrial cyclical stocks, Applegate says. The industrials, he says, have been relatively undervalued. And looking ahead to next year, he predicts the Dow will eventually hit 2,600. Just because markets have fallen in the first years of past new administrations, particularly Republican administrations, is no reliable guide to what will happen in 1989, he observes.
There has been speculation that a Bush administration, abetted by a Republican-dominated Federal Reserve, might prefer to get any future recession out of the way early, such as in 1989. That might make it easier to campaign in the midterm congressional election in 1990, as well as the 1992 presidential election. Applegate finds such speculation preposterous. ``If you were to have a recession today, you solve a problem that you don't have - high inflation - but you exacerbate serious problems that you do have,'' including the budget deficit, he says.
Mr. Stack, however, throws up caution flags about 1989. ``In four of the past six elections the Fed has raised the discount rate within 90 days after the election,'' he says. ``That spells slower growth, raises the value of competing financial investments such as bonds and money market funds, and makes it more difficult to justify stocks.''