Bush victory a short-term boost for stock markets; longer-range impact murky

By Gary Norris –
TORONTO (CP) – The re-election of George W. Bush bodes well for the North American economy, a prominent Canadian-based economist proclaimed Wednesday as stock markets celebrated the Republican victory and the loonie gained more than a cent.
A less exuberant view was that investors may be in for just four more years of the same. On the third hand, as economists tend to say, the economy and financial markets could be heading for a “spontaneous abortion” sometime in the next four years, brought low by gigantic U.S. budget and trade deficits and massive household indebtedness.

There was general agreement that the Bush victory is a near-term positive for the stock market.
“The bottom line is that the pro-business candidate appears to have won,” commented David Rosenberg, chief North American economist for Merrill Lynch.
On Wall Street, the Dow Jones industrial average advanced by about 93 points, or nearly one per cent, although the U.S. dollar sold off, boosting Canada’s currency to a fresh 12-year high against the greenback.
The loonie rose 1.08 cents US to 82.76 cents US, a level not seen since September, 1992. Analysts noted the Republican victory reminded markets about huge deficits run up in the first Bush administration, which put downward pressure on the U.S. dollar against the world’s currencies.
“The market is more comfortable with a known commodity,” observed Tom Caldwell, chairman of Caldwell Securities Ltd. “There was a concern that (Democratic challenger John Kerry) didn’t understand the nature of the broader war that we’re involved in, or the enemy that confronts us.”
Anxiety about the outcome of the election had hobbled the stock market for weeks, keeping share prices in a tight trading range. While Wall Street was obviously pleased with the result, analysts warned the week could end with some profit-taking as investors start refocusing on the economy.
“The market will be on a better footing with this behind us,” said Jay Suskind, head trader at Ryan Beck & Co. in New York. “You’ll see a rally, but then I think you’ll also see some profit-taking. A lot of the issues we’ve all been concerned about are still there.”
Sherry Cooper, a transplanted American who is global economic strategist at BMO Nesbitt Burns, issued an enthusiastic commentary predicting that the “historic” election will produce “dramatic initiatives” in Bush’s second term.
“Among them, look for further tax cuts and the permanent reduction in the dividend and capital gains tax rates,” she wrote. “He will likely support elimination of the estate tax as well, and has supported greater reliance on consumption taxes, a sea change in federal taxation.”
Cooper also foresees increased spending on national security, which “obviously won’t help the burgeoning federal budget deficit, but strong GDP growth, in time, will help stem the tide of mounting red ink.”
Less hopeful on the deficit front was Ross Healy, president of Strategic Analysis Corp., a Toronto-based money manager.
Bush, who in four years has turned a federal budget surplus of more than $200 billion into a deficit exceeding $400 million, “has already made dead clear to us that we are going to have a continuation of fiscal irresponsibility,” Healy said.
Noting Wednesday’s gladness on financial markets, he observed that with Washington spending freely and interest rates low, “money floods into the system; they’re hoping that’s going to positively affect stocks, as well as real estate.”
However, at some unpredictable time in the future, “there will be a spontaneous abortion, and probably quite a serious downdraft for the American market in particular,” Healy said, adding that this would pull down Canada too.
For now, “the election of George Bush has put any meaningful correction off,” Healy said, describing himself as bullish on the near future.
“We’re going to run until the horses are exhausted. We don’t know when that’s going to be, but in the short term it would be really stupid to bet against it.”
After the Bush “victory rally,” markets will return to fundamentals, said RBC Financial Group economist Carl Gomez.
“It’s guesswork to say what impact Bush’s policies will have over the next four years, but certainly for now, just looking at the U.S. economy in the short term, growth is still there.”
For American business, the defeat of Kerry averts the prospect of tighter media ownership rules, stricter environmental standards and stronger drug price regulation, as well as a higher minimum wage and a rollback of Bush tax cuts.
The likely effect on Canada is “pretty much four more years of the same,” said RBC’s Gomez. “Certain problems on the trade side that we’ve had in Canada may be approached in the same manner – specifically the softwood lumber disagreement, some of the duty problems with hogs, things like that.”
More positively, BMO’s Cooper said that “NAFTA renegotiation and serious protectionist measures are now unlikely.”
Caldwell noted that although Canadian sentiment generally favours the U.S. Democratic party, the trade barriers against Canada have been brought forward by Democrats – “and the Democrats are very pro-big-labour which, make no mistake, are no friends of Canada.”
Merrill’s Rosenberg cautioned that “While many investors will treat the election results enthusiastically, it may not be a winning strategy to extrapolate the current rebound in the equity market into the future.”
He noted that Bush won in 2000 on a pro-business agenda.
“Who would have thought back then that four years later, the S&P 500 would be down 20 per cent and the 10-year (U.S. Treasury) note yield is down 185 basis points. While the president is powerful, there is no one we can point to that in the past could control the vagaries of the business and profit cycle on his own.”
Source: MoneySense Canada