Every day the market went up after the election, I asked myself whether I wanted to blog the increase in shareholder optimism. I didn't want to draw too close a correlation. Many variables drive a good equities market and it is a fool's game to look at the DJIA as being representative of the economy.
I was correct to wait. A "nanny nanny boo boo" gloat on a short rally would have been below the standards for even my posts. Yet I will link to this article in TCS today, The Shareholder Election.
Since the conclusion of the presidential election, total shareholder wealth has increased $430 billion, or roughly 3.8 percent in just seven days of trading. Total shareholder wealth is now at its highest level since April 19, 2001. It's astonishing to see that in just seven trading days shareholder wealth resumed immediately above the levels not experienced since before March when Sen. John Kerry became the official Democratic nominee for president.
So why did this happen? First, the ending of election season has lifted the cloud of uncertainty that was weighing on equity markets. Second, the reelection of Bush keeps the investor tax cuts in place. Finally, the expansion of a pro-growth, pro-investor House and Senate paves the way for major tort reform, further tax cuts, Social Security reform, and expanded trade. These measures will boost shareholder value, both in the short and long term, and markets have responded accordingly.
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In fact, lowering the capital gains tax is more than just a lower tax burden for investors every April 15th. Capital gains tax cuts boost the after tax return on equities, which in turn, increases stock prices. The capital gains tax was reduced in 1997 and 2003 and both times shareholder wealth increased by $2 trillion in the first 180 days following the tax cut. The possibility of repealing this tax cut was pricing into the market.
Major tax reform would add 15% to the S&P500. And the "ownership society" will provide a far more solid GOP base than will any social issues. Red and Blue demographics aside, this is the real opportunity for realignment.