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Points to Consider When Investing for 2005
On Balance, Factors Appear Positive
By Noel Lamb, Chief Investment Officer — North America
Russell Investment Group
Global Leaders in Multi-Manager Investing
The following article has been issued by our parent Frank Russell Company in Tacoma, Washington
Should investors decide to review their US equity holdings for 2005 in the next few weeks, the impact of President Bush's policies on the markets undoubtedly will be uppermost in their minds.
Although much depends on how the President implements his policies and whether any extraneous events intervene, at present it looks as though the positive impacts might outweigh the negatives for the markets, particularly in the health care, defense and energy sectors.
As a guide, here is an estimate of what the second Bush administration might bring.
Potential Positive Developments for the US Market
Should Bush go ahead with his plan to privatize at least part of the Social Security system, more investments are likely to be made in equities, bonds and international stocks. Those markets would benefit.
On balance, the drug companies and hospitals are likely to benefit from moves that Bush makes toward health-care reform. Whereas aspects of his policies could harm the drug companies and hospitals, others could benefit them. The result, however, could be a net positive gain.
Should Bush follow through on his plan to introduce tort reform, particularly in cases brought against drug companies and hospitals, the big players in that field could benefit.
A Bush administration is likely to follow policies that benefit large oil companies. He could, for example, allow exploration in northern Alaska and extend it to the western states. Bush might also encourage the development of more nuclear-powered plants.
An aggressive foreign policy would likely benefit the defense sector. Even if geopolitical tensions lessen, the country may need to increase defense spending to keep the military at its present levels.
Telecommunications companies and utilities could benefit should the Bush administration introduce more deregulation in these fields than a Kerry administration might have done.
The performance of these companies should also benefit from the dividend tax cut being made permanent as they produce higher-than-market dividend yields.
Potential Negative Developments for the Market
Should the deficit continue to grow in the way it has the past four years, the result could be negative for bonds as well as for the U.S. dollar.
As the U.S. seeks more and more investors to fund the deficit, interest rates could rise to attract more investors. Higher rates would depress the price of bonds — which react inversely to rates — and could hurt the stock market, particularly if they rise too quickly and too sharply.
A larger deficit could lead to an increase in taxes to make up for the growing shortfall. Such an increase could, in turn, slow down the economy and could therefore lead to a weaker dollar.
Among the proposals discussed by the Bush administration are those that would seek to impose taxes on goods that are finished overseas. Such taxes could hurt multinational companies, as they would, in effect, raise the price of the goods.
One such proposal would impose a value-added tax on goods. Such a tax would be imposed at each level of production so that a product that starts out in Michigan, is processed in Florida and then is completed overseas would still be taxed at the first two points.
Even though these proposals do not materialize soon, the general uncertainty about what form the "revenue neutral" tax code reform will take could affect companies that are rumored to be affected by it.
The Bush administration is less likely to place as much focus on alternative energy sources as a Kerry administration might have done. Companies that produce products that make use of wind, solar or geothermal energy therefore are likely to fare less well than they may have under Kerry.
Should the Bush administration be as aggressive in foreign policy in the next four years as it was in the first four, some investors may shy away from stocks and invest in gold as a safe haven. Such a move would clearly be negative for the stock market, but would be positive for gold.
Drawing our lines on the balance sheet for 2004 and looking forward, the future for 2005, if not entirely rosy, may be seen as positive.
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