The surprise National election results could well be the biggest event for capitalism and the stock market in thelast 20 years. Whether you agree with George W. Bush’s politics or not, the country solidified and rendered amandate that gives the President the opportunity to move his agenda forward.
The part of his agenda that will have a direct impact on the securities markets is of the most interest to us. Taxrate cuts have the effect of immediately increasing rates of return after tax, and as a result, have a direct effect onstock and bond prices as investors chase higher after-tax returns. Exactly what the president will propose is notyet known, but it will matter greatly. A move toward eliminating the death tax and accelerating the income taxcuts will have a positive effect on stocks, as consumers and families will have more income and assets to investand spend. A capital gains tax cut will clearly have a positive effect on growth stocks, while the elimination ofthe double tax on dividends will likely favor value stocks. Short-term cosmetic changes, tax credits, and othertemporary stimuli will have little positive effect. Doing nothing, on the other hand, could lead to disastrousresults as markets continue to unwind in a deflationary mood.
We have recently been adding to equity exposure, looking for a sizeable “relief” rally. The election resultssuddenly put in place the probability of positive long-term tax change. This likelihood was virtually non-existenttwo days ago with the Senate controlled by Tom Daschle. Now, rather than a relief rally, we are contemplating anew bull market for stocks right around the corner.
A bull market, however, will be dependent on leadership and timeliness. We desperately need to support assetvalues, and there is no better method than to increase rates of return through tax cuts. As this probability unfolds,you can expect us to become more fully invested. This is beginning to look like the best buying opportunity in along time. We will keep you informed as this wonderful story unfolds.