Navigating an Election-Year Market

Politics, not economics, is putting the brakes on a rally in stocks, argues investment strategist Vincent Catalano

The market has skulked for most of the year, but don't blame the usual suspects: higher energy prices, weaker consumer spending, and fears of inflation. The real culprit is the Presidential race, says Vincent Catalano, chief investment strategist at iViewResearch in Cross River, N.Y.

And the market's angst will continue until the election is over, Catalano believes, with perhaps a slight postconvention reprieve. BusinessWeek Online's Suzanne Robitaille corresponded by e-mail with Catalano about investor uncertainty in this politically charged market. Here are edited excerpts of their exchange:

Q: What's the biggest factor affecting the market?


The really important issues aren't economic. The uncertainty of a Kerry Administration has unnerved many investors. This isn't to say that other nonpolitical factors don't matter. They do, but much less so when the election has such profound ramifications (see BW Online, 8/30/04, "Nothing to Fear but the Election Itself").

Q: So if it weren't for the Bush-Kerry contest, we might be seeing stronger stock prices?


Most likely, yes. In years with highly contested elections -- especially this one because there's so much at stake -- the period before the vote has tended to be one of great uncertainty, with the markets choppy. And as we all know, investors hate uncertainty.

Q: If the Republican Convention goes off without a hitch next week, will stocks react positively?


There should be enough relief to move stocks higher. However, if the market responds positively and quickly, it likely won't be a long-lasting rally because of the mixed technical conditions.

As a New Yorker, I can tell you that defending the city against any and all terror attacks is nearly impossible. If there are any terrorists in the U.S. who have the capacity to act, given the high profile of Bush at the convention, this is the time and the place. Granted, the area around [the convention] will be a nearly impenetrable fortress, but there are far too many other areas in and around New York where trouble can occur.

And when you add to the mix hundreds of thousands of protestors, you have all the makings of a chaotic situation similar to the Democratic Convention in Chicago in 1968. This can't be dismissed as a minor concern for the market.

Q: Most Wall Street types clearly favor Bush. What could happen if Kerry wins?


The fear of a President Kerry is high on Wall Street. Since many Wall Streeters are also well off, they'll lose money on a personal basis if Kerry wins, because he plans to raise taxes on the wealthier population.

Regardless of who wins, however, history shows that the stock market rallies during the first months of the first year of a President's term. So the market should rise -- possibly even strongly -- into the first half of 2005. It will be after that when the pain begins, regardless of who wins.

Q: That's still good news for investors who are looking up to one year ahead.


There's strong potential for a much higher market, given the low valuation levels we've been seeing and the fact that the market has been acting like a coiled spring, ready to bounce.

A key postelection point to remember is where the political differences lie between Bush and Kerry. Certain sectors will do well under a second Bush term, [and others will] under Kerry -- probably energy, consumer staples, selected technology, industrials, and utilities (see BW Online, 8/20/04, "Bush or Kerry: The Impact on Stocks").

Q: What should investors do?


There's not much investors can or should do. The market will likely remain choppy until the election. Other factors will count, too, such as energy prices, interest rates, and consumer spending, but the dominant issue should remain the election.

In such a market, as has been the case all year, sectors, styles, and stock selection have ruled, as opposed to just indexing. And this shouldn't change for quite some time, certainly into and through the election.

Edited by Patricia O'Connell

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