Regardless of who wins, with the next president known, much of the uncertainty that has prevailed over the prior months begins to dissipate. There is now some semblance of visibility of what may happen moving forward in terms of economic policy and whether you like those policies or not, at least citizens and corporations alike can plan accordingly.

Dow Jones Industrials Monthly Returns Since 1990
	Mean % Gain In ...
Month	Years Incumbent Wins	Non-Election Years
November	3.75%	0.53%
December	0.99%	1.76%
Nov-Dec	4.77%	2.30%
Source: Ned Davis Research, Inc.

And when an incumbent is reelected the uncertainty can lift quite quickly. Indeed Bush began laying out key economic policy objectives for his second term two days after the election. As I have written before, the stock market hates uncertainty so, all things being equal, the end of the election is therefor a plus for the market. In fact, when the incumbent wins, the November-December period has typically been a strong one for the market, much stronger than in non-election years (see table at left).

What Does A Bush Victory Mean
Most likely, the strong partisan feelings generated during this latest election cycle won’t recede quickly. That likely means four more years of bickering, especially since the GOP will likely be ambitious over the next year or so before the mid-term elections. The president wants a "consequential presidency". In his first term, he was, for the most part, arguably bold and decisive -- right or wrong -- so it’s a fair assumption that he won’t hang back in his second term. It would be reasonable to expect Bush to push for more tax code reform, social security reform, and more immediate attention to Iraq (the administration can now probably tolerate some more headline risk).

Conventional thinking suggests that the initial reaction of the stock market to Bush's reelection will be to favor energy (oil-friendly administration?), financials (partial privatization of Social Security?), defense contractors (more military commitments?), healthcare (Big Pharma and hospitals due to new Medicare policies, but not biotech because of controlled spending in stem cell research?), and dividend-paying stocks (Bush will preserve dividend tax cut) will do better. This may well be the case, but we are concerned about some far bigger issues facing this president and the country that the stock market will soon have to focus on besides which sectors may get an initial bump.

The biggest issue facing our own economy is Debt. Whether we are talking about household debt, the federal debt, or the U.S. trade deficit, the numbers are alarming. Simply put at each of these levels, we are spending more than we take in. This cannot go on indefinitely. Balance sheets need to be cleaned up and spending reconciled to income levels.

Household debt has grown 65% faster than the economy in recent years and is nearly off the charts at over 86% of GDP (see chart below) and 114% of disposable income. The U.S. savings rate is under 2%; a healthy rate would be closer to 10%. Assuming that interest rates don’t continue to fall, we are unlikely to see another round of mortgage re-financings to put extra money in consumers pockets again. All of which adds up to the fact that U.S. consumers spending, which makes up the bulk of our economic growth, and quite frankly is the primary driver of global growth, will need to slow below recent levels and even below long-term averages.

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As mentioned above, however, it isn’t just consumers who need to tighten their belts. The Federal Government is running on borrowed money as well. Although total federal debt as a percentage of GDP (63%) is still below it's mid-1990s peaks (67%), the trend is toward increased deficits (see chart below). There are several ways to reduce the Federal debt: simply pay it off (thereby sacrificing current consumption or economic stimulus), default (hopefully not a solution), or make it "easier" to pay off our debts through higher inflation rates or a weaker currency or both.

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The way that excessive debt levels are reconciled in most countries is through this third solution: a weaker currency and higher inflation rates. We don’t expect things to be any different in the U.S. and so we continue to believe that the dollar will get weaker and that inflation rates will likely move up.

We continue to manage our portfolios around these twin themes of a weaker dollar and a rising inflation. Within our equity allocations this means a heavy dose of international equity funds, which should do better than domestic funds if the dollar gets weaker. We also continue to hold many different positions that should do well in a reflationary environment, including some "alternative" commodity-based exposures. With reflation, we also expect that interest rates will likely rise over time, so we remain on the defensive with our fixed-income holdings. We have diversified into unconventional bond holdings, and we have decreased the duration or interest rate sensitivity in our portfolios, sometimes using cash to effectively reduce duration.

Enhanced Service to You
As mentioned last month, we have now launched our new enhanced website. Again, there are many new features, including our Five-Factor Equity Model, Marketscope a table that is updated daily showing how the various segments of the stock and bond markets have been performing over several rolling time periods, an additional monthly commentary from our Director of Research and co-Portfolio Manager Rusty Vanneman, CFA that gives you some insights into our research process (this month’s article: "The Role of Quantitative Measures in Fund Selection"), as well as a monthly article from one of our analysts (this month Chris Keith talks about Fidelity Strategic Income). As always, please let us know what you think -- what you like and what you don’t. Thank you again for your confidence in us and if you have any questions, please don't hesitate to contact us.