11-9-08 ThinkDow.com: More than political stability is needed

11-9-08 ThinkDow.com: Wall Street's reaction so far to a new U.S. president and a more Democratic Congress hasn't screamed optimism for the future. Not that a whole lot was expected, evidenced by the nearly 10 percent decline in the Dow Jones Industrials Wednesday and Thursday and the overall decline of about 4 percent for the week.. Serious economic problems weren't expected to dissipate just because the election was over, though some uncertainty now is removed from the equation. The stock market likes stability. And while there is some political clarity now, the economic questions are far from resolved. But there is some precedent for a bump. Historically, equity markets -- the Dow, Nasdaq and other stock markets -- have risen between Election Day and the end of the year when the presidency shifts from a Republican to a Democrat, climbing an average of 5 percent in 1960, 1976 and 1992, according to John Lynch, the chief market analyst of Evergreen Investments, writing in Wachovia Bank's Wealth Management newsletter on Wednesday. He notes that when a Democratic majority in Congress is also in place, the average annual gain rises to 8.8 percent. Another pattern to take note of is the stock market's apparent four-year cycle, described by market historian Yale Hirsch's Presidential Election Cycle Theory. Hirsch says the stock market does well in a presidential election year, badly in the year after the election and then improves until the next presidential election. This pattern has held up for most of the century, although it's being tested by the two terms of President George W. Bush. Beyond the markets, investors have to wrap their arms around how a Barack Obama presidency will affect taxes, the likelihood it will create new regulations on major industries such as energy and pharmaceuticals, and the possibility of labor unions gaining new strength in the U.S. workplace. And while much attention was paid to Obama's promise of tax relief to all but higher-income individuals, the incoming president will be initially confronting a rising unemployment rate and a continuing groggy housing market that has caused much of the nation's economic ills. Jonathan Hamilton, professor and chairman of the economics department at the University of Florida, said an Obama presidency probably won't have any immediate affect on the stock market. It became clear to many people two weeks ago that Obama probably would win the election and Democrats would retain control of Congress. As for adopting any major government programs that might spark the stock market, that's going to be tricky. "The big uncertainty is how much he is going to do in the current budget environment," Hamilton said. Sean Snaith, director of University of Central Florida's Institute for Economic Competitiveness, said what happens with tax cuts should depend on how the economy is holding up. If the economy is still mired in a recession, repealing those tax cuts could be dangerous. "I think the biggest mistake would be to allow those to expire when the economy is in a recession, or one that is still on shaky legs," Snaith said. As for new regulations, Snaith believes energy and pharmaceuticals are among sectors that will be eyed for new regulations and price controls. "Those are two industries that certainly are at risk," Snaith said. "The question is to what extent." Don't forget about the financial services sector, Lynch said in the newsletter. "In an Obama administration, the prospects are likely for investment banks, asset managers, student lenders and credit rating agencies to experience increased regulation. Negative headlines, reduced revenue streams and higher costs of compliance with the increased oversight could negatively impact profitability for many companies in these industries," Lynch said.