TCS Daily

The Shareholder Election

By Daniel Clifton - November 12, 2004 12:00 AM

Since the conclusion of the presidential election, total shareholder wealth has increased $430 billion, or roughly 3.8 percent in just seven days of trading. Total shareholder wealth is now at its highest level since April 19, 2001. It's astonishing to see that in just seven trading days shareholder wealth resumed immediately above the levels not experienced since before March when Sen. John Kerry became the official Democratic nominee for president.

So why did this happen? First, the ending of election season has lifted the cloud of uncertainty that was weighing on equity markets. Second, the reelection of Bush keeps the investor tax cuts in place. Finally, the expansion of a pro-growth, pro-investor House and Senate paves the way for major tort reform, further tax cuts, Social Security reform, and expanded trade. These measures will boost shareholder value, both in the short and long term, and markets have responded accordingly.

Clearly, the uncertainty in the stock market caused by the election has been removed. Since Sen. John Kerry became the apparent Democratic nominee for president, uncertainty weighed heavily on equity markets. This uncertainty stopped the 11 month, $2.5 trillion rally in equity markets as soon as Kerry became the apparent Democratic nominee for president. As such, the end of the election alone has added roughly $150 billion to $200 billion of new shareholder wealth. With this cloud of uncertainty finally lifted, markets can resume back to the economic fundamentals.

Second, no major changes will be made to the capital gains and dividend tax cuts signed into law by President Bush in May 2003. Clearly, part of the uncertainty of the election was caused by the difference in the two candidates' positions on capital gains and dividend taxes. Kerry's proposal to raise the capital gains and dividend taxes would have an unquestionable negative effect on the markets, all else being equal.

In fact, lowering the capital gains tax is more than just a lower tax burden for investors every April 15th. Capital gains tax cuts boost the after tax return on equities, which in turn, increases stock prices. The capital gains tax was reduced in 1997 and 2003 and both times shareholder wealth increased by $2 trillion in the first 180 days following the tax cut. The possibility of repealing this tax cut was pricing into the market.

The same is true for Kerry's proposal to repeal the very successful dividend tax cut. A recent Associated Press article by Rachel Beck erroneously concluded the dividend tax cut had no effect on the market or the economy. Tell that misstatement to the shareholders of the 379 companies on the S&P 500 that have raised their dividends since the tax cut. Also tell that to the shareholders of the 24 companies on the S&P 500 Index that have initiated first time dividends, which finally reversed the 25-year decline in dividend paying companies. New initiations and larger dividend increases explains why annualized personal dividend income has been hovering around 10 percent growth for the past eight months.

Bush's victory coupled with an expansion of supporters of the capital gains and dividend tax cuts elected ensures these pro-growth, pro-investor tax cuts remain in place and increases the probability of further cuts in the rates over the next four years.

The third factor contributing to the rise in shareholder wealth is the increase of pro-growth Senators who will help move major shareholder legislation in the coming two years. Previously, Senate Democrats have been able to effectively block major legislative proposals by invoking a "filibuster" which requires 60 votes to pass legislation, despite the fact that more than 50 members of the Senate supported the measure. With an increase in pro-growth Senators the ability for filibusters to be invoked has diminished significantly.

As a result, expect substantial activity on tort reform, including Class Action reform, asbestos reform, and medical malpractice caps. Moreover, the elimination of the Death Tax now has 60 votes to clear a filibuster and action on this should take place sometime in 2006. Further movement will be made with bilateral trade agreements which will open new markets for American companies.

Finally, the door is now open for the Bush Administration to reform Social Security with personal retirement accounts. With each American holding an account, trillions of dollars will be moved from a low return government sector to high return private equity markets. The infusion of new capital into the markets will boost shareholder wealth across the board and more importantly, finally open investing opportunities for every working American. Social Security changes will also be coupled with Individual Retirement Account (IRA) and 401(k) expansions.

The proposals put forward by Bush stands in stark contrast to Kerry. The Democratic nominee put forward proposals to tax investors and lower their returns. He put forward proposals to erect trade barriers thus reducing the ability for American companies to expand in new markets. And he put forward class warfare rhetoric completely at odds with the thinking of investor voters, which represented nearly 65 percent of all voters in Tuesday's elections.

As a result, the 2004 election confirmed the GOP dominance of the new investor class as the election marked the third national election of investor voters moving to the GOP column in large numbers. Bush won members of the self identified "investor class" by a whopping margin of 61-37 according to a post election poll commissioned by the American Shareholders Association (ASA). Voters who owned individually held stock, 401(k)'s, IRAs, and other investment vehicles all voted for Bush in majorities exceeding the national total. Conversely, Kerry and Bush were essentially tied among non-investors.

Remarkably, investors headed into Election Day with $1.3 trillion less in their portfolios than before Bush was elected and they still voted for him in sizeable majorities. Democrats thought this will benefit them. But they had no way to explain the decline was because of President Bush's policies nor did they put forward a proposal that would boost shareholder value. Instead they engaged in their typical class warfare rhetoric, called for tax increases on investors, and put forward big government solutions to public policy problems.

The Democratic rhetoric completely ignores the thinking of the investor voters, who are traditionally independent people and do not view themselves as a disadvantaged group collectively. Moreover, they do not see the government solving all their problems. Rather, investors are forward thinking people who strive for better performance in the future.

President Bush put forward a pro-growth, pro-investor platform to ensure recent shareholder gains were kept intact and to make certain more gains in the future. Investors responded by casting their ballots for him and the markets responded accordingly.

Bush's ownership society proposal will also bring more working Americans into the investing community. With more workers invested in the market, the possibility exists for more GOP voters in the future.

Clearly, the Democrats need to change their approach to public policy to meet the needs of the burgeoning investor class supermajority. If not, the Democratic Party will be relegated to minority status for a long time.

Daniel Clifton is executive director of the American Shareholders Association. He can be reached at


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