Skip to comments.Calculating the Effect of the Election on the Stock Market
Posted on 09/17/2004 9:18:42 AM PDT by NedWilliams
Kerry and Bush have very different plans for future capital gains rate. Because this rate effects the return on investment, it has a major impact on stock valuation.
Kerry plans to let the rate revert to 20%, while Bush plans to eliminate it. At the 15% rate, investors receive 85% of the underlying company's profits and future growth. Under Kerry, this return will drop 6% to 80%, after the increase to 20%. Under Bush, the probable yield remains 85%, since abolishing the cap gains tax is politically unlikely. However, if capital gains could be abolished the yield would increase 17%, from 85% to 100%.
Therefore, the more likely it is that Kerry will be elected, the closer the market drop approaches 6%. The more likely a Bush election, the more the market reverts to the mean.