The end of 2010
was a surprisingly
busy time of
year. November’s
mid-term elections saw
Republicans resume
control of the House of
Representatives and narrow
the gap in the Senate to a
mere six seats. That newly
Republican-heavy Congress
passed an extension to the
Bush-era tax cuts. And
consumer holiday spending
put retailers in a very black
mood, with some estimates
putting planned consumer
spending as much as 3-5
percent higher than last year.
In the face of that news,
the stock market responded.
“We saw, in the third and
fourth quarters, a nice run
up in the stock market,” says
Sam Erwin, president and
CEO of The Palmetto Bank.
Part of that was definitely
a response to economically
friendly actions. But part of
it was also simply knowing
the outcome. “The market
does not like uncertainty,”
Erwin says.
And while many investors
may be breathing a
sigh of relief that a more
business-friendly Republican
Congress will enact rules
and legislation that favors
business interests, Charles
Flowers, analyst with Abacus
Planning Group in Columbia,
says that perception
hasn’t always turned out to
be true.
In fact, when you look
at the data, he says, the stock
market has traditionally
performed better under
Democrats than Republicans.
What both men agree
on is, while government and
its policies are certainly a
factor in the performance
of the market, it isn’t the
only factor. Corporate
profits, consumer confidence,
productivity levels — all
these factors can have just as
much, if not more, impact on
the market’s performance.
“We’re back to the
fundamentals,” says Erwin.
How 2010 Affects 2011
Certain actions taken
during 2010 will — and
already have — affected
this year’s stock market
performance.
For example, says Erwin,
the Frank-Dodd bill that
is intended to reform Wall
Street will likely also have
a profound impact on
community banks as well.
While the bill was passed
last year, the task of implementing
the far-reaching
legislation has yet to be finalized. A more Republican government may be more favorable to the business community.
Another example is the tax legislation
that President Obama signed at the
beginning of December, which could
have a profound impact both financially
and psychologically.
Small business are feeling somewhat
relieved, says Mickey Whitlock, Registered
Principal with Raymond James
Financial in Greenville. “In our opinion,
all of these changes are favorable to
financial markets going into 2011.”
Simply the clarity surrounding the
tax cuts has been of benefit to the stock
market. “That’s a direct stimulus,” says
Flowers.
What’s Ahead for 2011
Predicting the stock market,
though, isn’t easy regardless of which
party is in power. “It’s hard to tell,”
says Flowers. Lots of great things are
happening, but there are still many
challenges ahead — Social Security, the
federal deficit and Medicaid changes, to
name a few.
“We’re very happy to see people
talking about (these),” says Flowers, and
the fundamentals for market growth
(cash on business balance sheets, for
example) are there.
According to Erwin, 2011 will probably
be a better year than 2010, but not
a fantastic one. “Generally, we expect it’s
going to be another tough year.”
Whitlock, too, is seeing opportunity
in 2011. With a more divided Congress,
he says, President Obama may be more
willing to pass legislation that’s favorable
to both parties.
According to Whitlock, historically,
when an administration has lost
mid-term elections to a more moderate
Congress (as happened under
Eisenhower, Reagan and Clinton), the
economy has flourished.
“We’d like to think that’s going to
happen this time,” he says.
“The economy is a very open
and dynamic system,” Flowers says.
The government is a large player in
economic output, but it’s only one
of the players. “The U.S. is still very
business friendly regardless of who is
in power.”
What Does It Mean
for the Investor?
No one can predict the market,
Flowers says. And while unpredictable
forces can impact the market, “There’s a
lot of stuff we can control.
Keeping expenses low, diversifying
and understanding your risk tolerance
are all things that investors can and
should use to guide their investment
strategy.
“It’s the distance running, not the
sprint running, that makes a successful
investor,” he says.
According to Whitlock, our history
is to be resilient. His advice to investors?
Always get started!e
finalized. A more Republican
government may be more
favorable to the business
community.