I normally don’t "do" politics, except where it intersects with the Economy and with Markets.
As such, I expected last week’s State of the Union address to be a
non-issue. The President has little political capital left to initiate
any major new programs that are potentially Market moving; Its arguable how much he even had once he won
re-election. My read of it was that a) the electorate was uncomfortable
switching riders in the middle of a war; and 2) the alternatives were not
all that compelling.
As far as markets are concerned, the key element here is Sentiment: As
we have shown in the past, 75% of gains in the last Bull Market were
due to P/E expansion. Thats a purely psychological phenomenon.
The ongoing political risks to the market are:
Tax Cuts — the stock market likes them short term, but the bond market is all too aware of the impact of deficits on inflation;
Foreign affairs — Iraq is a continued drag, both economically and psychologically, while the WMD development in Iran is roiling the oil market;
GeoPolitical — The Muslim uprising in Europe raises strong
questions about future integration issues; Ongoing unrest could be
problematic for the EU; Colleagues in Europe — Amsterdam in particular
— claim this is merely the tip of the iceberg, and is only going to
Boomer Issues — The failure to deal with the rising costs of Social Security and Medicare is an ongoing problem; The country does not want a vast overhaul — they want the programs funded. This will also be an ongoing market issue.
Complicating matters is the ongoing drop in the President’s approval ratings: The WSJ noted: "PRESIDENT BUSH’S approval rating, according to various opinion polls, has dropped in recent months, but the decline is just the tail end of a steady drop since a high point shortly after the Sept. 11 attacks."
Polling Data: President Bush Approval Ratings
Courtesy of WSJ
Note: Each colored line tracks positive answers to each poll’s key question on presidential approval rating:
NBC News/Wall Street Journal: In general, do you approve or disapprove of the job that George W. Bush is doing as president?
Harris Interactive: How would you rate the job President George W. Bush is doing as president – excellent, pretty good, only fair, or poor? (Approve comprises excellent and pretty good.)
Washington Post/ABC: Do you approve or disapprove of the way George W. Bush is handling his job as president? Do you approve/disapprove strongly or somewhat? (Results are "net approval" responses.)
CNN/USA Today/Gallup: Do you approve or disapprove of the way George W. Bush is handling his job as president?
AP/Ipsos: Overall, do you approve, disapprove or have mixed feelings about the way George W. Bush is handling his job as President? (Results are "net approval" responses.)
Public’s Focus Is Health Care, Troop Cuts in Iraq
Poll Shows Clear Demands That President Will Face For State of Union Speech
By JOHN HARWOOD
Staff Reporter of THE WALL STREET JOURNAL
January 31, 2006; Page A4
HART/MCINTURFF Study #6060
NBC News/Wall Street Journal Survey