As voters trudge off to the primaries, investors are asking if they will be winners when the presidential election year ends.
Four years ago, stocks sold off during the long count between George Bush and Al Gore, helping push the market lower.
Barring a repeat of the recount debacle or the Nasdaq market collapse, which characterized 2000, the consensus Wall Street forecast calls for stock returns in the low teens this year.
Jeremy Grantham, chairman of investment managers Grantham, Mayo, Van Otterloo & Co., finds a predictable pattern of restraint in the first two years of the term and stimulus in the final two years, as the next election nears.
"I'm a new devotee to the power of politics in the stock market," he said. Politicians "know what they're doing. It's amazing to me. I didn't think politicians got anything right."
Said Bruce Bittles, chief strategist at investment banker R.W. Baird: "Typically, the market does well in the election (but) not as well as the pre-election year. The average gains are about 12 percent or 13 percent in an election year."
The last year an incumbent Republican won re-election was 1984, when Ronald Reagan handily beat Walter Mondale.
The prevailing forecast for 2004 calls for a repeat of the Republican 1984 victory. But stocks were flat that year, as the widely predicted outcome failed to inspire investors until 1985.
There tends to be less buyers' remorse among investors when the Republican Party retains the White House. By contrast, stocks fell sharply in November 1948, after Harry Truman won. But this time, stock market skeptics say the Bush administration and Federal Reserve have stoked the economy so strongly, with tax cuts and cheap money, that inevitable austerity after the election will disappoint investors.
A more optimistic view says the stimulative effects of current fiscal and monetary policy will sustain the current rebound in stocks.
Here are four dangers investors must be aware of this election year:
Interest rates. The consensus on Wall Street sees long-term interest rates slightly higher by the end of the year, curtailing mortgage activity and slowing the economy.
Higher interest rates erode demand for stocks, because higher rates increase corporate expenses and provide investors with an attractive alternative to equities.
But weak jobs reports and an absence of inflation already have prompted many forecasters to postpone the onset of higher interest rates until at least late this year.
"For most of the year, rates will stay around 4.5 percent," said Bittles. "Bonds are behaving better than we expected at this stage."
"The risk is that China and Japan will sell Treasury securities," said Charles Callard of Callard Asset Management. Declining demand for U.S. Treasuries by non-U.S. investors would force interest rates higher.
Corporate profits. Analysts do not expect the strong growth in profits reported in the second half of 2003 to persist.
"As the year wears on, the ice gets thinner," said Grantham. "The odds of doing well are better in the first half of the year than the second half."
The effects of last year's economic and fiscal stimulus on corporate profits will wear off month by month in 2004, he said.
Strong profit results in the third and fourth quarters of 2003 will make percentage comparisons more difficult for companies in the second half of this year.
But the stock market looks forward, Bittles said. Declining profit growth this year may not diminish investor enthusiasm for the years ahead.
Dollar trend. In 2003 the weak dollar in foreign currency markets helped boost profits for U.S. multinational corporations.
The cheaper dollar permits such companies to post higher revenues and profits from non-U.S. operations.
The fear is that the dollar's slide will not subside but instead will erode confidence in U.S. investments and force interest rates higher.
Said John Llewellyn, global chief economist for Lehman Brothers, "Foreigners are not investing in the U.S. on quite the scale they were." Noting the U.S. government and trade deficits, he said, "Nobody can live permanently spending more than it saves."
Expectations for 2005. "Next year is awful," said Grantham. "I'm looking out at the black hole of '05 and '06."
Grantham expects the party will be over, as the government reins in investor-friendly fiscal and monetary policies as the next presidential term begins.
"Speculators take their risk in years three and four (of each term), as they should do. In the years one and two, the message from the administration and the Fed is the opposite and you should avoid risk."
If the trend in the dollar plays out as it did from 1985 to 1988, investors could be in for a rough ride after this election year, said Llewellyn.
Then, as now, a persistent decline in the dollar prompted official statements of concern. As now, international pressure swelled on the United States to reduce its government and trade deficits.
But efforts by governments to halt the dollar slide failed, helping spark the stock market crash of 1987.
"We're not projecting that sort of decline, but it happened," Llewellyn said.