With U.S. President George Bush winning a second term, National Bank Financial notes that stockbrokers might be happy, but bond and U.S. dollar traders aren’t.

NBF says that the fears that the election results would not be known for days did not materialize allowing the financial markets to refocus quickly on fundamentals. “Foreign exchange and bond traders do not seem to be inclined to join the Republican and stock market festivities,” it says, noting “FX and bonds already feel the hangover effects of large budget deficits for as far as the eye can see. The currency is trading at an eight-year low and is threatening to fall further.”

This is “Not a friendly environment for a bond market that next week has to go through its quarterly refunding and a FOMC meeting. In the longer run, there always is the risk that a less than orderly decline in the U.S. dollar could undermine foreigners’ demand for U.S. Equities,” NBF warns.

Standard & Poor’s predicts the S&P 500 is going to the 1,150 mark by the end of the year due to the quick result. “We think the market is likely to experience a near-term relief rally,” it says. “… led by gains in those industries that were projected to be pressured by a possible Kerry victory: Dividend-paying issues, along with Major Pharmaceuticals, Managed Care, Textile Manufacturers/Importers, and Information Technology companies with a significant offshore presence, just to name a few. What’s more, defense contractors energy companies and selected financial firms are likely to experience a firming of their share prices.”

“Once the relief rally has run its course, we believe the fundamental backdrop will reassert itself. The budget deficit remains the largest in history and likely precludes additional fiscal stimulus. In addition, we see the value of the U.S. dollar continuing its slide in response to the enormous trade deficit,” S&P says, echoing NBF. “During the coming fours years, we think President Bush, like President Reagan in his second term, will have to turn his focus from recovery to reform. Not only tax reform, but also tort and health care reform.”

“On a sector basis, we remain cautious about the longer-term prospects for the major pharmaceuticals, despite a possible near-term rally. We believe companies in this group will experience an increase in litigation in the months ahead, as a result of recent product recalls and FDA scrutiny. We think new drugs are likely to undergo extended trials, while existing entities may be required to undergo re-trials. What’s more, we believe drug company pipelines remain thin by historical standards and are not sufficient
to offset looming patent expirations,” S&P says.

S&P also cautions that many defense shares are trading at or above their sustainable EPS growth and profitability potential. “In general, we forecast single-digit returns from the S&P 500 in 2005 and recommend a balanced investment allocation,” it says. “We suggest the average investor have 45% in domestic equities, 15% in foreign issues, 25% in short-term bonds and 15% in cash, and suggest a focus on high-quality issues across the market cap and growth/value spectrum.”