Buying the Nasdaq? Watch the Polls
By Donald Luskin
March 19, 2004
www.smartmoney.com
OK, I WAS definitely early two weeks ago when I wrote that the drop in the Nasdaq was "a buyable dip". And in this game, early equals wrong.
Since then, the Nasdaq has gotten cheaper, but the reasons for buying it have just gotten better and better. If it was a buyable dip two weeks ago, it's a very buyable dip now.
When I wrote two weeks ago, I pointed out that the Nasdaq 100 so far this year has been perfectly tracking the probability that George W. Bush would win re-election. As Bush's chances have fallen this year, so has the Nasdaq.
But now Bush has broken out. Take a look at this chart of the futures contract on the probability of Bush's re-election, traded online at Tradesports.com with the Nasdaq 100 overlaid on it. Bush's chances peaked at 75% in early January, and broke down from there. A breakdown in the Nasdaq came a week later (and a droop in the market overall followed shortly after that). But in just the last week, Bush's chances have risen from a low of 58.3% to 63.8% — a clear break in the downtrend.
Can a breakout in the Nasdaq be far behind?
Is this relationship between the Nasdaq and Bush for real? Why would the Nasdaq care whether or not George Bush is re-elected? It's simple: It's all about taxes.
The tech-laden Nasdaq is supersensitive to the chances of Bush's re-election because technology companies are the supersensitive to the risk of the repeal or nonextension of the tax cuts enacted last year. Those cuts reduced the top rates on capital-gains and dividend income, which acted as a powerful stimulant to investment and risk-taking. That's good for technology purchases and good for technology stocks.
As president, John Kerry would work to repeal those tax cuts and veto attempts by a Republican congress to extend them. Feel free to think that's the right thing to do, but it's a fact that one of the consequences of it would be a slower-growing economy, and growth industries like tech would suffer the most of all.
So when Bush does better, the Nasdaq does better.
And at these levels, the Nasdaq is priced right. Valuations now are such that investors are being well paid to take risk on the expectation that Bush's fortunes are indeed turning around here. According to my valuation work, the tech sector is cheaper now than at any time since October 2002, the bottom of the bear market in tech stocks. The relative valuation of the tech sector — comparing it with the rest of the Standard & Poor's 500 — is cheaper now than at any time since March 2001, which was a significant intermediate-term bottom for tech.
Which leaves two questions: Why did Bush's breakout happen, and will it last?
As a short-term proposition at least, it is surely the case that the winding down of the Democratic primary season marks the end of a period of free publicity for John Kerry in which he has been able to position himself as a man of destiny, coming from behind to clinch his party's nomination. It has been a time — to use the language of securities analysis — of easy comparables. Now the comparables are getting harder.
Already, a recent New York Times/CBS poll shows Kerry's approval rating falling to 28% from 37% over the last two weeks, while Bush's has risen to 43% from 41%.
Separately, the presence of Ralph Nader in the race is unquestionably a boon for Bush, siphoning votes away from Kerry. The NYT/CBS poll shows that a two-way race today would be narrowly won by Bush, 46% to 44%. But with Nader in a three-way race, Bush still gets 46%, while Kerry falls to 38% and Nader gets 7%.
Kerry's momentum against Bush in the primary season has been based on his ability to sow fears about what is, in reality, a strongly improving economic outlook. Supposedly slow employment growth has been cleverly linked to deep-seated post-9/11 national-security concerns, by exaggerating the scope and impact of the loss of American jobs to foreign countries. The NYT/CBS poll shows that the economy and jobs are now cited as America's top two most important issues by 31% of voters, up from 22% at mid-December.
After two months of virtual silence, Bush has begun to fight back on this front. The mere fact that he's finally speaking at all is a good thing — his silence had allowed doubts to fester.
Based on my conversations with White House insiders and recent public statements of administration officials, we are convinced that Bush grasps the importance of reframing the public's perception of the economic recovery of the last year, and linking his economic policies to his natural brand strength in national security. In a major speech last week he introduced the expression "economic isolationism" as a way of rebuking antiglobalization protectionists, and drawing the analogy between the projection of American economic strength and the projection of American military strength.
And we can't overlook the importance of last week's terrorist attacks in Spain, and their potential for reigniting public interest in issues about which Bush has real brand strength. In the NYT/CBS poll, the number of voters who believe Bush did the right thing by attacking Iraq grew to 58% from 54% over the last two weeks. And Bush is perceived as far stronger than Kerry in terms of expected protection against terrorist attack: 78% favorable, compared with 61%. Terrorism and threats of terrorism in Europe can only help Bush in America.
Politics isn't the only bull case here. As I mentioned earlier, valuations are very attractive right now. And technicals are beginning to line up, too. My friend Fred Goodman, who publishes a daily technical analysis report on my Web site, thinks a major intermediate-term technical buy signal is just days away. (Remember, Fred nailed the bottom a year ago — he knows what he's talking about.)
Fred also points out that contrary sentiment is falling into place, too. He tracks the percentage of bullish and bearish retail investors and notes that the bulls have retreated to the lowest percentage in six months. That's a sign that there are no speculative excesses in the market, and validates the idea that stocks are a good value here.
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