Should investors be paying attention to the bull and the bear or the donkey and the elephant? At this time during every presidential election year many have a tendency to turn their attention to the political pundits for some insight into what the White House might offer their portfolio. Polls are being watched closely and much discussion and debate revolves around how President Bush or Senator Kerry will impact the markets. Although it is too early to weigh in on stock market performance for the current administration, we do know that dating back to 1932 there have been only two presidential terms where the stock market lost money – the Hoover administration during the Great Depression and under Franklin Roosevelt in the late 1930’s. Each of the subsequent 15 presidential terms over the past 60+ years produced positive returns for the stock market . This suggests that our investment focus should remain on the bull and the bear, as the donkey and the elephant have both been beneficial to the stock market.
Past performance is no guarantee of future results. Investors cannot invest directly in an index.
The markets seemed preoccupied with oil rather than politics during the third quarter. Hurricane Ivan, Nigerian rebels and continued unrest in the Middle East combined to push oil prices beyond $50 per barrel during the quarter . The impact of high oil prices on consumer spending is of significant importance to the equity markets. As consumers allocate more resources to fuel consumption there is less discretionary income available to spend on other goods and services. This brought some concern to the markets over the quarter, as evidenced by the equity index returns presented above.
The Fed acted twice during the quarter, pushing short-term interest rates up in 25 basis point increments to 1.75% . The tightening of monetary policy had a calming influence in the bond market where longer-term interest rates declined significantly. Many bond investors feel the upward trend in short-term rates should keep inflation near current levels. If they are right, future coupon payments received by bond investors should not have diminished purchasing power. This attraction brought increased demand for bonds over the quarter, pushing the bond market prices higher.
The state of the U.S. economy remains strong as we move into the fourth quarter of 2004. Most notable areas of economic strength are the manufacturing and housing sectors. Both durable goods orders and new home sales maintained positive momentum over the quarter past. And new building permits continued to be issued at a robust pace, suggesting little in the way of a slowdown in the housing market . Consumer sentiment declined marginally during the quarter, holding back growth in retail sales . This prompted Fed Chairman Greenspan to suggest in July that the economy had entered a “soft patch”. The soft patch was very short lived, as by mid-September the Chairman stated the economy had regained momentum, allowing for the continued tightening of monetary policy.
The months ahead should be fascinating. The uncertain political landscape and active fuel prices may increase market volatility over the near-term. Those in the high-risk game of making short-term market bets may have a bit more to work with over the fourth quarter. This will have little impact on our focus as fundamental investors as the long-term opportunity in the market remains unchanged.
