THE TALON RICHARD A. CLEMENS, CFA CPA PRESIDENT / PRINCIPAL
NOVEMBER 3, 2004
POLITICS AND INVESTING
A Hawkish Look at the Election Aftermath
DO EL ECTIO NS M ATT ER?
W
ith the election process seemingly settled with thankfully less contention than in 2000, let’s consider how government policy affects security markets and how the 2004 election may affect policy. The quadrennial electoral process dominates media attention and often results in quick market moves — like today’s rally in U.S. stocks — but does the election significantly influence long-run security returns? Hawk does not base investment decisions on political party affiliation. Yet, Hawk acknowledges policy affects economic conditions and drive security markets. Thus, Hawk focuses on policy rather than the party. In evaluating government policy, Hawk scrutinizes monetary policy (money supply), fiscal policy (taxation and spending), and regulation. Together, these policies create opportunities and challenges.
Fiscal policy widely variant between the parties and candidates’ campaign promises that often disregard consequences. Tax policy has more relevance to security markets than spending initiatives. Low taxes and a simple code encourage wealth creation by all — rich, poor, firms, and families. High taxes and a complex code result in resources inefficiently pursuing tax avoidance rather than more productive means.
“Security returns that previous studies attributed to changes in political landscape are really associated with monetary policy.” —Bob Johnson, CFA
Monetary policy uses the Federal banking system to maintain full employment while controlling inflation. Monetary policy, set by The Federal Reserve Board, may have the most significant financial market impact. Bob Johnson, CFA and CFA Institute executive VP, co-authored research with Scott Beyer and Gerry Jensen, of Northern Illinois University. The CFA Magazine (Sep-Oct 2004) cites their research, “Don’t Worry about the Election, Just Watch the Fed,” finding that “monetary policy, not the political affiliation of the President, has the most significant association with security returns.”
HAWK INVESTMENT MANAGEMENT,
Hawk seeks monetary stability and prefers an autonomous Fed. Currently, the Fed is raising interest rates to tighten money supply and moderate economic growth.
Regulation can have significant impact on security markets. Excessive regulation strangles business and usually becomes ineffective in a dynamic business setting. Mutual fund scandals exposed ineffective rules that were unchanged since the Investment Company Act of 1940.
Hawk prefers well-designed regulations that provide benefits that exceed their costs. Regulation must encourage responsibility yet foster prosperity. Hawk’s overall evaluation measures real (after inflation) Treasury borrowing rates as measured by the 10-year Treasury note, a security market bellwether. Hawk prefers the real rate to equal sustainable economic growth (roughly 3%). The real rate is currently 1.8% indicating room for higher rates.
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A gracious concession from Senator John Kerry begins George W. Bush’s second term as President. With robust control of Congress, Republicans may create a more conservative agenda for policy initiatives. How might the proposed policies impact security markets?
Monetary Policy
Bush staunchly supports the Federal Reserve Board and Chairman Greenspan. Fed autonomy to execute policy as it sees fit should be welcome by the markets.
Fiscal Policy
Taxation — Tax cuts during Bush’s first term appear on safe ground and a stronger Congressional majority, the GOP may succeed in ridding the sunset clauses in the tax legislation. Markets have already begun to rise in this significant development. Spending —Spending policy which is controlled by Congress should be more controlled under stronger Republican leadership. However, the first Bush term proved surprisingly liberal with spending. Wait to see how fiscal deficits may affect Treasury rates.
Regulation
Trends should increasingly favor business in search of economic expansion. Bush acknowledges that the recovery remains tenuous. Any new regulation likely will seek strong corporate governance. The markets should favor these regulations.
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