Bush Wins, Now What?

A narrowly divided Senate and growing deficits will mean the re-elected president will have little impact on your investments or tax bill.

November 3, 2004

Despite a mild relief rally that lifted stocks, a newly re-elected Bush Administration is not expected to have much impact on your investments, but the outlook for more permanent tax cuts looks bright.

Traders were confident of a Bush victory well before the 11 a.m. concession call by Sen. John Kerry.

Ohio and a few battleground states were still counting their ballots when Kerry realized that a win in Ohio appeared remote. Both candidates needed the state's 20 Electoral College votes to win. Bush claimed victory in a nationally televised speech later in the afternoon.

Stocks started the day strong. The Dow Jones Industrial Average surged 178 points early before closing at 10137, up 101 points. The Standard and Poor's 500-stock index, finished 19.5 points higher at 2004.3.

Republican gains also spread to the Senate and give Bush some breathing room, especially in a few key committees. The Republicans will hold 55 Senate seats; the Democrats control 45. The GOP also gained a few seats in the House of Representatives, claiming at least 229 of the 435 members.

But Congress remains hotly partisan and broad moves on tax reform or social security would require winning over at least a few Senate Democrats. Bush will also be constrained by a large budget deficit.

Fiscal and ideological differences between House and Senate Republicans could also temper some initiatives.

Markets love gridlock

But as the past has shown, financial markets are partial to gridlock.

We expect the Standard & Poor's 500-stock index to move up about 5% for the year after a 22% rise last year. Look for the S&P to end the year around 1170.

There's lots of cash to invest, nearly 10% of assets, which is almost double the level in 1999, according to Morgan Stanley. As the uncertainty dissipates, stocks will be a more attractive option.

The traditional-energy sector and the defense sector will both breathe a sigh of relief.

Peter Cohan, an executive-in-residence at Babson College, has put together an index of publicly traded companies in the coal, oil, refining, natural-gas and defense industries. He calculates that, as a group, those stocks were up 43% between January 2001 and July 2004. In contrast, the S&P 500 was down 18% for the same period. "If Bush is reelected, those industries will continue to do well," predicts Cohan.

But don't expect Bush to please the bond market because he is unlikely to significantly reduce the nation's debt or make much of a dent in the budget deficit.

Taxes and other issues

That would make sweeping reform of the tax code difficult. But permanent enactment of his first-term tax cuts stand a better than 50-50 chance.

And what about the other issues Bush addressed? Here are our predictions. (See the October 29 The Kiplinger Letter for more):

Social security: Privatization won't happen; too expensive.

Job growth: Don't expect many gains. The White House has little impact on the economy.

Budget deficit: Most spending is on autopilot, going to entitlements and debt interest. Little of the red ink will be erased.

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