Fisher Investments 2006 Market Update*

With the US Midterm elections set for 7th November, 2006, Fisher Investments shares its view on the probable outcome and the potential impact on capital markets.

Winners and losers
The Republicans may likely lose seats in November but we think it is doubtful the Democrats will win a majority in Congress, despite speculation to the contrary. The reasoning? Over the past century, the House has never changed hands unless the Senate has too. Democrats must keep all of their own seats and win almost every close-race seat in the Senate to win the House. In addition, there are more Democratic Senate seats up for re-election than Republican and more open Democratic seats than Republican.

Market reaction

• Suggestions that the Democrats will win a Congressional majority seem to have spooked the markets—uncertainty depresses markets, making stocks a good value at present and setting the stage for an upside surprise.
• In the coming weeks, we believe markets will realize a transition of power to the Democrats is unlikely and will move upwards in response.
• A reduced Republican majority should result in political gridlock, limiting potential for far-reaching legislative reform over the next two years. This will be bullish for markets.

Are markets elephants or donkeys?

• Despite a popular belief that markets prefer one party over another, history shows little difference in their performance under either party.
• Capital markets would vote for political stability and against any legislative change that might lead to redistribution of wealth through taxation and welfare reform, perceived as assaults on capitalism.

Andrew Teufel, Director of Research at Fisher Investments said, “We at Fisher are unpartisan in our political allegiances, as are markets which tend to react more favorably to a continuation of the status quo rather than the election success of any particular party. In the upcoming Midterm elections, the Republicans enjoy structural advantages which should prevent the Democrats winning an overall majority. This is bullish for equities. Furthermore, a reduced Republican majority will restrict legislative and social reform which should boost US markets and have a positive effect in markets globally.

“We believe that equities have been undervalued all year. With the uncertainty surrounding the Midterms seemingly priced into shares, we feel this is an even better opportunity to own equities than at the beginning of 2006.”

*Forecast as of October 2006. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.