Updated: May 3, 2013 12:14PM
Originally published: November 4, 2004
Now the markets get to vote. What does this election mean for stocks, for interest rates and for your personal finances? History gives some interesting clues. With control of the presidency and Congress retained by one party, and with the president backed by a majority of voters for the first time in more than a decade, chances are good for new legislation to impact all of your money decisions.
History says that Tuesday’s election should have a positive impact on stock prices, with the GOP improving its control of Congress while George Bush continues to reside at 1500 Pennsylvania Ave. According to The Stock Trader’s Almanac (latest edition for 2005 is now in bookstores, Wiley, $34.95), going back to 1901, the Dow Jones Industrial average has posted an average annual return of 9.3 percent when Republicans control both the presidency and Congress.
(The only better historic combination is under a Democratic president and a Republican Congress, which historically has resulted in average annual market gains of 11.5 percent.)
And, according to Jeffrey Hirsch, editor of the almanac, when the Republican Party retains the White House, the Dow has gained an average of 5.7 percent from election day to year’s end.
Jim Stach of InvesTech Research points out that in 15 of 26 election years since 1900, the Dow Jones industrial average hit its high for the year in the fourth quarter, right after the election. And only three of 26 election years have seen the Dow hit its low for the year in the fourth quarter. So yesterday’s rally could continue for a while.
Looking ahead to 2005, there’s even more good news, though not necessarily based on the election. The Stock Trader’s Almanac notes that going back to 1885, there has never been a down market in a year ending in 5. In fact, the average gain for years ending in 5, going back to 1885, is 30.7 percent! That’s enough to send the bears into hibernation.
One other interesting cycle for the market is the presidential election cycle. The general pattern is that most recessions, bear markets or wars begin in the first two years after the election. The third year, post-election, is the best of the cycle. There hasn’t been a losing third year since 1939. And then you’re back to the next election year!
Estate and tax-planning will be a growth area, providing full-employment to accountants and lawyers for the next four years. I’m always advising people to make sure they have a current will -- but don’t jump now. Instead, watch for legislation permanently to eliminate the death tax. That’s legislation that will be high on the can-do list for an energized Republican Congress.
As a result of the election, the Bush tax message will prevail: Lower taxes encourage economic growth. In the new Congress you could see yet another reduction in the dividend- and capital-gains tax rates. So if you’re planning to sell stocks or property, you might want to postpone a decision until you see the tax impact of any legislation.
And upcoming legislation could also include the end of the alternative-minimum tax that hits so many double-earner, middle-income families. Lower taxes and more money in your pocket could indeed lead to a better economy and more jobs.
From a global point of view, the election sends a different message. The worry is that stronger GOP control of the budget process could result in even more spending, and larger deficits. The Republican-controlled Congress showed little spending restraint in the past four years, and the president demonstrated no willingness to veto any of those spending bills. The world markets’ first take on the possibility of more of the same was a drop in the value of the dollar and slight rise in the price of gold. That may not seem important to your financial plans, but along with a falling dollar comes rising interest rates. That’s the bribe we pay to foreigners to buy our debt, even though its value is declining.
Interest rates head higher
In fact, yields on the 10-year Treasury note edged higher, potentially setting the stage for a hike in rates for market-linked mortgage or home-equity loans and credit-card interest rates. Any tax cuts in your pocket could be swept away by higher monthly payments on your loans.
Thankfully, the election process was settled in one day. The markets hate uncertainty. But the economic results of this election will take months to calculate. This is no time to ignore your personal financial decisions. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.