As the politicians sort out whether Bush got a post-convention pop or not, watch to see if the stock market pops or not. It is on a cusp, and the way it breaks will point to whether Bush gets re-elected. Normally stock markets do ok in the two months leading to an election, whereas in the other three years they tend to dive in Sep/Oct. This year it is still unclear which way it will go. The consensus Elliott Wave position is that the Dow has retraced all it should, so at best it should hover around its current level and then take a dive. Specifically, it should at most touch Dow10407, then dive. If it rushes through to higher levels, something else is going on - a bull market? This would mean that the Bush/Greenspan economic policies have successfully bridged us through the potential disaster following the dot-com bubble of 2000.
The macro issue is whether Bush/Greenspan have truly solved the problem of the deflationary depression that tends to follow investment bubbles, ie. what happened after 1837 (canal frenzy), 1873 (RR bubble) and 1929 (electricity). Keynes recommended massive liquidity via government spending and borrowing. Hoover tried this somewhat (he increased govt spending) but also supported a balance-the-budget tax increase in '31 that was the nail in the coffin for any recovery. FDR restored confidence but also issued contradictory policies that overall didn't work. (It took a war to bring us out of the Depression.) Neither of them applied Keynesian economics to the limit, as Bush has now done.
The alternative to Keynes, the Austrian school of economics, believes it would have been better to let the recession happen in the '30s - the market would have come out on its own - rather than impose a conflicting set of regulations on the economy that turned a recession into a depression. But their theories were not tested, and Keynes reigned in the post-war era, with Nixon saying "We are all Keynesians now" just as the stagflationary '70s showed the limits of Keynesian economics. In 1981 Reagan/Volcker followed the Austrian school when Volcker slammed the brakes on inflation with high interest rates and Reagan promoted the supply-side with deregulation and tax cuts. So at least we know how to fix inflation; we still do not know if we know how to avoid the post-bubble deflation.
While Bush claims the legacy of Reagan, he is following in the footsteps of Hoover and FDR, with demand-side economics. So far the Bush/Greenspan approach is working. They have applied the Keynesian cure to the limit, with a drop in interest rates to encourage borrowing (refinances of mortgages mostly), a deep tax cut (dividend tax reduction mostly), a massive jolt of government spending (including a new entitlement for drugs), and a nice little war. The recent stock market rally indeed began with the start of the war. The stimulus is running out, however. Growth is slowing, consumer spending is slowing, and it is still unclear if business spending will pick up the slack. Statements from Greenspan on this topic should be taken with skepticism, as Fed Chairmen have typically seen their role as including instilling confidence in their policies, not simply reporting the facts.
The direction of this election will be much clearer by the first week of October. We will have had more recent information on economic trends - especially whether the business side is filling in for the slackening consumer side. And the stock market should have broken out of its slow slide since last January, one way or the other.