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U.S. Markets, Economy Face Serious Challenges Post-Election"
NEW YORK -- Regardless of who wins the U.S. presidential election on Nov. 2, the new administration will face an enormous challenge, according to analysts at Standard & Poor's.The United States is running a current account deficit of more than 5% of Gross Domestic Product, attributable in part to a diminishing personal savings rate, which has declined to around 1% of GDP from high single digits a decade ago and a loosening fiscal stance during the past four years. When combined with other factors such as rising dependence on foreign capital for domestic investment and heightened spending for military operations in Iraq and Afghanistan, it becomes a difficult challenge for any administration -- Democrat or Republican, liberal or conservative, the analysts said."What either candidate can do will be limited by what he is inheriting," said David Wyss, chief economist at Standard & Poor's. "Risks to the underlying economy -- and to the federal government's ability to manage it -- remain. In these circumstances, it's going to be hard to increase spending or to cut taxes significantly."But investors should not expect quick resolution of a number of pressing issues -- such as the current account deficit and looming pension shortfalls -- from the next administration. "Broad policy issues don't tend to be negotiated well in the current political environment," said Clifford Griep, executive managing director chief credit officer. "They tend to be politicized and polarized."Meanwhile, Standard & Poor's forecasts a short-term Federal funds rate for 2003 of 2.3% and further increases at a measured pace to 3.5% in 2005. Credit spreads will remain tight, a function of improvements in credit quality, declining default rates, and low equity market volatility."The corporate health of nonfinancials is excellent," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research group. "There has been a huge cash buildup. The outlook is guardedly optimistic, and that extends to the whole credit spectrum."In the equity markets, investors will have to moderate their expectations for 2005 regardless of the outcome of the election. After a two-year bull market in the S&P 500, equity investors would be well advised to diversify their portfolios, with a bias toward large-cap and international stocks that would be least vulnerable to volatility, the analysts agreed. Standard & Poor's global Equity Research Services group forecasts that the S&P 500 will record a modest increase in 2005, after realizing an expected gain of less than 5% in 2004. "Investors should become single-digit bulls," said Sam Stovall, chief investment strategist. "The easy money has already been made."Further confounding equity investors, it's becoming more difficult to identify sectors other than energy to lead the market. Within that sector, integrated oil and gas companies -- which explore, produce and sell -- continue to appear attractive. Not only are they successfully passing on the dramatic rise in oil prices to both industrial users and ultimately consumers, but their strong cash flows, strong fiscal restraint, and generally conservative accounting policies are working to raise valuation levels in the industry. "We believe the market is likely to reward these companies with higher multiples," said Kenneth Shea, managing director of global equity research.Visit Standard & Poor's: www.standardandpoors.com"