“You are a flaming Bush-loving Republican idiot.”
So began an e-mail I received this morning about last Friday’s column. There have been dozens like it in recent weeks because I’ve dared to be bullish on growth and tech, and because I’ve dared to argue that the stock market will perform better if George Bush is re-elected.
I’ve been right so far on growth and tech stocks. I wrote here on July 23 that a bottom was near, and it was. The NASDAQ 100 is now up 12.3% since its August 12 low. As for my political leanings, I can tell you with absolute assurance that I’m neither flaming, Bush-loving nor Republican. Judge for yourself whether or not I’m an idiot.
And as to the equity market preferring the president over John Kerry, for me that’s not a matter of politics. You should vote for whomever you want. Yet, it’s a fact that Bush fared his worst in the polls on August 12, the same day the NASDAQ 100 and the S&P 500 bottomed out. Bush and the markets have been rising together ever since. I rest my case.
But right now no one wants to look at what’s really happening in the market, the economy or anywhere else. This country has come down with a wicked case of ECD: election compulsive disorder. Symptoms include an obsession with politics to the exclusion of all other interests (it’s all the media talk about anymore, so it must be the only thing that matters); an overwhelming fear that the world is coming to an end (after all, both presidential candidates tell you so every day); and uncontrolled aggressive behavior toward anyone you suspect of disagreeing with you (and, hey, nobody can punch you in the nose for calling them idiots via e-mail).
As a result of this ECD affliction, the markets have gotten out of whack. Stocks are insanely undervalued. With earnings up 19% so far in 2004, the S&P 500 is virtually unchanged. Why? Maybe because everyone’s so busy following the polls they’ve forgotten to follow the market. Values like today’s are akin to a $100 bill laying on the sidewalk and nobody bending over to pick it up.
Or perhaps it’s really that those who have noticed it are afraid to take advantage. After all, if the world is coming to an end the last thing you want to do is own stocks.
And how about bonds? Ten-year Treasurys are yielding about 4% or less while “core” inflation is running at 2%. By historical norms, bonds should yield more like 5.75% right now — and let’s not even talk about what they should yield if we considered real inflation that includes energy costs. But the world is coming to an end, and the economy is going to slow down before it does. Everyone thinks the Fed is going to keep interest rates ultra-low right up until the moment of the Final Trumpet. So who cares about inflation?
Don’t get me started on oil. Everyone seems to overlook the fact that even with demand supposedly surging in China, the world still produces about two million more barrels a day than it consumes. So where’s the shortage that’s driving prices through the roof? There isn’t one — it’s just that the oil market is so afraid of terrorism and revolution and pestilence and raining frogs that speculators are hoarding as much as they can get.
Of course if we could just cure ourselves of election compulsive disorder, then everything would be different. In a matter of weeks stocks could rally by 20% or more, bond yields could rise 100 basis points, and oil could drop by $10 a barrel.
What’s the cure for ECD? Simple. Have an election. And here’s the good news: We’re having one on Tuesday. In other words, as Kerry is so fond of saying, help is on the way.
If Bush wins, the stock market will get just what it wants and a 20% upside move by year’s end might prove to be a conservative estimate. If Kerry wins, that 20% is probably more than a bit too liberal. (Yes, the puns were intended.) But my call is that either way, stocks will do at least OK. They’re just too darn cheap to get very hurt here, almost no matter what.
Why? Because when the fear-mongering spewing forth from both political parties stops, suddenly investors won’t be so afraid anymore. If anything, they’ll be afraid of missing a great opportunity to buy stocks cheap. But they won’t be so worried about the imminent end of the world (that will be deferred for another four years).
There’s another reason that’s just as important: A healthy economy runs on trust. People have to trust and respect each other in order to do business. This bitter election year has divided America into two howling mobs that despise each other, so it’s no wonder how little business is getting done. How am I going to do business with a guy who calls me an idiot? I’m not.
Once the election is over, there’s a good chance that we’ll all remember that we’re in this together. And that’s going to do more to get economic growth back on track than anyone can imagine.
There’s really only one thing that worries me about all this. If voting is so close that the lawyers are called in, things could get worse before they get better. The last thing we need is for an already bitter and divided America to see this election end up in court — like it did in 2000, but only more so. This time both parties have thousands of attorneys standing by nationwide. It could really be ugly.
For traders and investors, next week is going to be very tricky. There really is an excellent chance the election will cure America of ECD, and the big moves we saw in stocks and oil this week were probably a foreshadowing of that. But I think we can’t ignore the possibility that Tuesday night and Wednesday will be filled with even more nastiness if the lawyers start to get engaged.
If that nastiness doesn’t pass within a day or two, then things could get a lot worse before they get better. In the election of 1876, legal challenges became so complex and spread across so many states that the president was not officially named until March. It could happen again, but I pray that it won’t.
So my advice is simple: Don’t forget to vote. And the moment after you vote, put politics behind you and become an investor again — because these next few weeks will be very interesting and probably very, very rewarding.
The above is an “Ahead of the Curve” column published October 29, 2004 on SmartMoney.com, where Luskin is a Contributing Editor.