Straight Up from Here?

The good news that the election is over and that October payrolls swelled by 337,000 boosted shares. But S&P expects some retracement

By Joseph Lisanti

Despite fears that it would, Ohio didn't become the Florida of 2004, and the long presidential election process has ended. Wall Street responded with a strong relief rally after the winner was obvious.

Although we expect the market to end the year higher than it began, we don't see the post-election surge as a harbinger of huge percentage gains in the months ahead. The reason is simple: Most of the economic problems the nation faced before the election are still here.

The price of oil, though down from its recent high, remains volatile. Another spike up could shake the confidence of consumers just as we enter the crucial holiday shopping season.

And imported oil is a contributor to the U.S. trade deficit, which is now about 5.5% of our gross domestic product. Furthermore, the trade deficit is likely to increase, according to David Wyss, Standard & Poor's chief economist. "The U.S. is living beyond its means," says Wyss. "We can't do this forever."

The large federal budget deficit is a less immediate concern. Right now it is helping to stimulate the U.S. economy, which is finally creating jobs at a fast enough pace to more than accommodate the growth in the labor force.

But down the road, the pending retirement of the baby boom generation will wreak havoc with the budget. Because of a previous tweaking of Social Security, current payments by workers exceed the payouts made to retirees. But that surplus has been used for other government expenditures, leaving the misnamed Social Security "trust fund" filled with federal promissory notes.

Although the budget deficit is not an imminent problem, it becomes more pressing by the day. Consider that the first wave of baby boomers will be eligible to take early, reduced Social Security benefits in just four years.

For now, we advise 45% in domestic stocks, 15% in foreign equities, 25% in short- and intermediate-term bonds, and 15% in cash.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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