Veto Power

Story Notes:

• The third year of a US president's term is usually very positive for stocks
• So far, 2007 has been a classic presidential third year with no major legislation passing into law
• With the 2008 election race revving up, congress is likely to accomplish even less in the next sixteen months

The third year of a US president's term is simply stellar for stocks historically. Doesn't matter who the president is, or what his agenda was—it's great for just about all of ‘em. A president's third year has historically been good for stocks because his party has typically lost seats in the midterm elections, leaving the country closer to legislative lock-up. A Congress split down the middle (or close to it) specializes in posturing and pontificating. But that's about it. Stocks love when there's little to note legislatively, preferring the status quo to government intervention in free enterprise.

MarketMinder has highlighted this theme over the last twelve months. See these past commentaries for more:

• A Presidential Popularity Contest, 7/25/2007
• A Political Punch, 5/31/2007
• Hot Fuzz, 5/17/2007

MarketMinder is agnostic to political affiliation. Donkeys or elephants, it makes little difference to us. Why? In the Beltway everyone's a politician first and foremost. This means politicians on both sides of the aisle are out to preserve and consolidate power and get reelected. That's always job one. Seeing politics in this way allows investors to view the landscape in a clear, unbiased way and make accurate decisions about the potential market and economic consequences of new legislation.

Thus far, this presidential third year has been archetypal. Politicians were front and center across media outlets—ubiquitously promising to take action on issues like trade with China, new taxes on private equity firms, healthcare reforms, and so on. But for all the talk, they've got nothing to show for it! A promise broken is the modus operandi of politicos, and we think that's a great thing.

The Democrats are too busy drafting resolutions denouncing a radio entertainer for practicing his right to free speech to pay much attention to other issues. And let's not forget the GOP, recently spending valuable time in Congressional session spearheading a resolution condemning a newspaper ad. Strong work guys!

The only material legislation that's passed through both Congressional chambers recently is a $35 billion increase in healthcare coverage (for folks mostly already covered by more efficient and better private insurance). 35 billion bucks is small change for a $13 trillion US economy, so it was nothing to get excited about in the first place. But the bill was DOA—Bush vetoed it as soon as it hit his desk.

With 2007 heading toward closure and the 2008 election machine revving up, the likelihood of any big new legislation in the next 16 months is extremely unlikely. The president's third year is the sweetest, but the fourth is historically almost as good. That's just another positive feature to today's stupendously benign equity environment.

Let the politicians keep expending their hot air on advertising censures and inane grandstanding—stocks will appreciate it.