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How the Bond Markets React
A New Weekly Fixed Income Feature at the BlueCollarDollar
11.08.04
The Celebration Syndrome

Stocks love the new President and with good reason. The pre-election mumblings about reform to the Social Security program means a new and as yet untapped source of wealth for the markets and the companies who look to it for financing. The reaction was palpable as the Dow and its counterpart indexes celebrated the first majority victory Mr. Bush has received.

The influx of new investors to Wall Street courtesy of policy changes on the Beltway has yet to happen and most likely will take quite a while to gel, but when they do, it will be a bonfire of the vanities once again. How to fund such an undertaking worries Wall Street somewhat but they feel that it is a surmountable challenge.

Knowing that the 15% tax on dividends will stay in place was enough to make traders swoon. But I believe the reaction was bit a fast and assumptive. The tax cut will remain but what will not may be the interest of foreign investors into the market. Valuations are high and will remain so for the near future. This makes continued investment less likely in a market that has high prices without much in the way of returns.

Investors need to ask themselves what they really expect from the markets. Even with the dividends counted into the mix, expecting high single digit returns from a balanced portfolio might be looking for too much. That is not a carrot worth chasing especially if your money might be better spent in a more vibrate, less debt addled market.

Mr. Bush's tax cuts have not unleashed the economy in any noticeable way and that is likely to be the reason we will not have the same expansion as they hope when speaking of the Reagan era. Modeling their handling after his economic maneuverings will carry much more bite as a result of deficits, interest rates, and inflation that those heydays of the eighties.

Expect an first of the year adjustment that will make efforts in Social Security reform to languish in Congress.