In two months, the American people will stream to polling stations from Wasilla, Alaska to Cambridge, Massachusetts and choose, arguably, the most powerful man in the world.
There will be plenty waiting for the winner of the White House: a stumbling economy, slumping home prices, a Russia returned to its traditional belligerence, Iraq and Afghanistan, and the endless confrontation with Iran and its nuclear program.
Does that mean it's time to buy?
Many factors must be considered when making investment decisions. However, Stephen Biggar, S&P's global director of equity research, says that while there is usually volatility in an election year, S&P believes "dollar-cost averaging to take advantage of currently depressed equity valuations remains a good long-term investing philosophy."
Of course there are challenges to equity appreciation in the near term. Sam Stovall, S&P's chief investment strategist, thinks that the next president's top priority will likely be to deal with, or avert, a recession. S&P Economics sees post-election fourth-quarter gross domestic product (GDP) declining by 0.5% and forecasts a post-inaugural, first-quarter GDP decline of 0.7%.
So, whoever calls 1600 Pennsylvania Avenue "home" for the next four years will need to address credit, housing, energy, and inflation. "Issues of concern include the duration of the projected recession," Stovall warned investors in a recent note, adding that he is also worried about "a protracted resolution to the credit crisis, a $114 average oil price forecast for 2008, and the likely impact of higher inflation indicators on the Fed's interest rate policy."
So what does this mean for investors? An economic slowdown threatens GDP growth, and it already eroded corporate profit outlooks. As of September 2 data, the P/E ratio for the S&P 500 was 16 times projected 2008 earnings and 16.3 times for the S&P 1500 Composite. As Stovall points out, S&P Equity Research profit projections are currently being revised downward, and may ultimately make the benchmarks' stocks appear unattractive on a valuation basis.
No matter who wins the election, investors should seize investment opportunities now for the long haul. "A year's worth of the positive benefit of lower interest rates, gradual easing of the credit crunch, and bottoming of the housing downturn should set the stage for improved GDP growth and corporate earnings in the latter half of 2009," according to Biggar.
From a macro perspective, Chief Economist David Wyss and Senior Economist Beth Ann Bovino agree that by this time next year, most challenges and risks to global growth, including the U.S. recession, will have likely subsided. While they see negative growth in two consecutive quarters — as mentioned earlier — they believe GDP for 2009 should end in the black with a 0.8% increase. Then, S&P Economics expects U.S. growth to climb to 3.1% in 2010 and 3.2% in 2011.
S&P Index Services, which operates independently from S&P Equity Research, agrees with Stovall that the key piece of business for the new administration will be to provide a stimulus to the economy. Howard Silverblatt, S&P's senior index analyst, has a slightly different take on the priorities for the new administration, but they are similar concerns: employment/unemployment and inflation. S&P Economics predicts these indicators will moderate in 2009.
As of payroll data released September 5, the unemployment rate reached 6.1% in August of 2008, the highest in five years. According to Wyss and Bovino, the U.S. should continue to post job losses for the rest of 2008. They project unemployment rates of 6.4% for 2009 and 2010 and 5.9% in 2011.
Meanwhile, core inflation is expected to end the year at 2.5%, according to S&P Economics. Inflation should moderate to 2.4% in 2009 before dropping to 2.1% in 2010 and 2.0% in 2011. Even headline inflation, which includes volatile food and energy prices, is expected to moderate next year, according to estimates from Wyss and Bovino.