William Smead
Chief Executive Officer
Chief Investment Officer 


 

 

Dear Clients and Prospective Clients:

The day before the 1980 Presidential Election was 28 years ago today. Ronald Reagan was ahead in the polls and the stock market had risen over 25% in the six months leading up to Election Day. Reagan ran on a platform of lower income and capital gain taxes and a strong national defense. Investors were very excited about the effects that Reagan’s policies might have in the future. The most popular stock sector in 1980 was defense stocks. The day after his victory over President Jimmy Carter, the New York Stock Exchange was two hours late opening due to massive buying interest. No group of stocks was hotter than defense stocks which hit a high they would not see for years. It took the Dow Jones Industrial Average two years to recover from the decline that followed the enthusiasm surrounding his victory. These “believers” led to a two-year bear market which saw the Dow Jones Industrial Average drop 22% over the next 22 months. Over two terms in office, Reagan’s policies have been given credit for future prosperity, but not in the short-term time frames that many investors “believed” on the first Monday in November in 1980.

The stock market had been horrendous from October of last year until last Monday, October 26th, dropping over 40% in a credit crisis and panic. On top of the difficult circumstances, the favorite tomorrow in the Presidential election is a candidate who is viewed as an anathema to investors, Barack Obama. He says he intends to raise income taxes on the wealthy ($250,000 income or greater) and capital gains taxes on everyone who pays above a 15% income tax bracket. He is viewed as especially bad for drug companies which received some of his most populist wrath in campaign speeches.

The stock market had its best week last week in over twenty years and the building contractor is not faced with any repair work from investors beating down our door to get into this market. The fact that there are “no believers” makes me think that Warren Buffett’s Op-Ed in the New York Times is going to be rewarded soon. If Obama gets elected tomorrow, we believe the next two years could be the antithesis of 1980-1982.

In Warm Anticipation,

William Smead

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