An Interview With Ned Davis -- It's at critical junctures that we want to know what the proprietor of Ned Davis Research in Venice, Fla., is thinking. We evidently called the right guy last week, because that's exactly where this master of market history and technical analysis thinks the market is at the moment.
Q: What do you make of the economic numbers? A: My underlying view is there is too much debt and there was never any buildup of savings during the recession, so there is really no pent-up demand. The consumer isn't in a position to do much. That is what all the bears say. Then I sit and look at the money supply and I see that when mortgage refinancings are booming and tax cuts or tax refunds are hitting, the money supply explodes. If you put a lot of money in people's pockets, they are going to spend it. We saw that in the middle of last year. The second half of last year was the best half since 1984, or maybe 1981, when there were tax cuts. It's a guarantee that if you give tax cuts or refunds, there will be surging growth. Is it sustainable? I don't think it is. March is going to be strong. April is going to be strong. It is going to be May or June before we know if the economy is slowing a bit and, by that time, there will have been two Fed meetings already.
Q: How does the war in Iraq factor into your outlook, since it seems to be worsening? A: Personally, it makes me sick to my stomach. From a contrarian standpoint, though, it is probably the one thing out there that has kept people from getting really manic and crazily bullish here. The uncertainty is going to weigh on the market. Every week, you say, "Oh my God, what is going to happen next?" We certainly didn't go there to fight a religious war, but somehow when you start killing Muslims, other Muslims see us as a Christian army, and that is very ugly. I don't want to overdo it because during the Vietnam War, we had plenty of bull and bear markets. Wars don't necessarily drive markets. But we don't need this extra uncertainty.
Q: If we have a Democratic president elected this fall, what should we expect from the market? A: The stock market has actually done better under Democrats than it has under Republicans. Even better than a Democratic president has been gridlock. The explanation for that is neither party can do too much damage and it's just checks and balances. I'm not sure that a Kerry victory is really going to shock the market, especially because the polls now show he has got a chance. And it is still going to be a Republican Congress. In 1960, we had a bouncy first part of the year and then the market rallied in the middle of the year. When it looked as if Kennedy had a chance, the market went straight down until the election and then headed straight up for the next 12 months. It had totally discounted that a guy with the initials JFK from Massachusetts would win. That could be a pretty good pattern for what might happen if Kerry wins. Election years are normally bouncy early in the year and then the market takes off. From August to November there is a very dramatic difference if the incumbent wins or the incumbent loses. If the incumbent wins, it goes straight up. When the incumbent loses, the market goes down. In August, after the conventions, you can make a pretty good bet on the stock market. If it looks like Kerry is going to win, the market is going to go down after August.