“That must be the tea!” – Caddyshack, 1980.

By David B. Armstrong, CFA | Sep 20, 2010 | Weekly Market Commentary

In keeping up with the positive responses to the movie quotes from American comedy films, I thought it was appropriate to quote the scene from Caddyshack where Judge Smails (played by Ted Knight in what I’d argue was his best and most memorable role) sends a whole tea set crashing down from the second floor onto his guests awaiting afternoon tea in his foyer.  Looking at the mess, an elderly female guest says, “That must be the tea…”  I suspect many Republicans and Democrats were saying the same thing last week as members of the Tea Party experienced some success in primary elections around the country.  So while the scene from the movie is funny, it has real meaning for investors in today’s economic and political environment.

The equity market has now finished higher for three straight weeks.  The Dow Jones Industrial Average (DJIA) gained 1.39% to finish the week at 10,608, the S&P 500 Index gained 1.45% to finish at 1,126 and the Nasdaq Composite Index gained 3.26% to finish at 2,316.  The Russell 2000, which measures smaller capitalization stocks, also gained 2.35% to finish at 651.

While we try to be policy free here at Monument Wealth Management, the upcoming mid-term elections do have some significance to equity investors.  A report out today from Andy Laperriere, who covers Policy at ISI, says that Republicans are poised to gain 6 to 10 Senate seats this year.  This, along with the Tea Party victories, may spark a mid-term move towards the center by Democrats and the Obama administration, similar to what President Clinton did in the 1990’s.  The impact of this may be that it helps raise the odds that the Bush tax cuts will be fully extended.  In fact, the Sept 17^th edition of Investor’s Business Daily reported that Speaker Pelosi has hinted she may be willing to give in on letting the upper income tax credit expire.

Most economists are still calling for a +2% real GDP number.  Last week, Ed Hyman of ISI conducted a survey of institutional investors in NYC and Greenwich to determine their expectations for GDP.  The result was a 2.3% average expected GDP.  As we have stated before, while this is a long way from zero, we readily acknowledge it is low.  In fact, it is too low to create enough new jobs to bring the current unemployment rate down.

We are encouraged by the turnaround in economic data since the summer.  While it’s easy to jump over a bar that is lying on the floor, we are jumping it nonetheless. We continue to see strong corporate earnings, balance sheets still have a lot of cash on hand, conditions overseas are improving and jobless claims are in a declining trend.  The market has responded positively to this.

Looking forward, we think the Bush tax cuts are going to be extended, mid-term elections will bring Congress and the administration back to center (more pro-business) and there  will be another round of quantitative easing by the Fed.

We base our opinions not only on the current environment, but on history.  The S&P 500 surged after the 1994 mid-term elections and also surged after the quantitative easing in 2009.  If we see both around the same time, it could be a great fourth quarter and end of the year for the market…leaving us with a final classic Caddyshack quote from Carl Spackler (played by Bill Murray).  “He’s on his final hole. He’s about 455 yards away, he’s gonna hit about a 2 iron I think….Cinderella story. Outta nowhere. A former greenskeeper, now, about to become the Masters champion. It looks like a mirac… It’s in the hole! It’s in the hole! It’s in the hole!

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**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

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