While we are bullish on the equity markets, particularly for growth investors, there are always risks. One of the primary risks for 2008 will likely be the Presidential election. Typically, it hasn't mattered a whole lot to the markets which party is in power, as long as there is a balance of power. However, when the power base becomes lopsided and either party rules exclusively, bad things can happen. The parties in power have to be careful about what they ask for as pure ideologies rarely work well in practice.
If the Democrats win the Presidential election, the likelihood that the Bush tax cuts get rolled back goes up. While tax increases are never good for the economy, they would be particularly perilous in a slowing economy, like the one we have right now. The best way to improve tax receipts, is by having a growing economy. The last few years are proof of this concept. Future tax hikes would deter investment and likely offset any stimulus provided by Fed rate cuts.
Most foreign economies have been lowering their tax rates in recent years. According to a speech given recently by Stephen Moore, senior economics writer for The Wall Street Journal, the U.S. is one of the only countries in the world that is even contemplating tax hikes. To raise our own domestic tax rates at a time when our economy is slowing and foreign economies are increasingly competitive would be a big mistake.
Hopefully, the rhetoric about rolling back the Bush tax deductions will stay that way, even if the Democrats take control. The issue is worth watching closely as the difference between a soft landing and a recession is at least 20% for the stock market.