James Picerno at The Capital Spectator does a good job explaining why the market has been a little indecisive recently, but I think he leaves out one important factor: political uncertainty. I talk to business owners, large and small, and the ones I've spoken to are all scared stiff that John Kerry might somehow win in November.

History seems to indicate that a split government -- with control of Congress and the White House divided between the parties -- is good for the economy, but there aren't a lot of data points to go on and there are many other external factors that muddle the issue. From the people I've talked to, the fears aren't over economic policy and taxes as much as over terrorism. Business leaders think a Kerry victory would increase the risk of terrorism to our country, and 9/11 demonstrated that terror is worse for the economy than are taxes.

I agree, sort of. I don't think John Kerry will have any choice but to continue in Afghanistan and Iraq, because those are done deals. What I'm concerned about is that he won't prosecute the rest of the War on Terror but will instead just cool his heels while North Korea and Iran fester and plot against us. If President Bush wins re-election I expect those two nations to be overturned by 2008, but if he doesn't they won't be and we'll be in much more danger.

Personally, I'm bullish. I still think Bush will win in a landslide, and the other economic data all look strong to me. Sure, there may be another terrorist attack no matter who wins election, but I don't think it will affect the market as much as 9/11 did. Of course, if it's a bigger attack than 9/11 it might, but then we'll have more important things to worry about than our portfolios.

Higher earnings over the past several quarters have helped bring down the market's valuation. The S&P's trailing price-earnings ratio, for instance, is about 20 today, vs. more than 60 back in early 2002. If Wall Street's consensus earnings outlook for the S&P for the year ahead proves accurate, the p/e will fall to about 17, assuming the index remains unchanged.

Ed Yardeni of Prudential Equity Group recently opined that "the balance sheets of corporate American are in the best shape ever." As a result, he says the market deserves to trade at a higher p/e. But the market's ignoring the improved state of corporate balance sheets, he notes. The good news: that mispricing creates opportunity, he believes, advising that "there's room for the p/e to rise once investors become aware of this great improvement."

A low p/e ratio is one of the key indicators of a good investment because it means that the price of the company is low relative to its earnings. So I'm buying.



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