WSJ: Why Some Think a Kerry Win Could Boost the Stock Market

Interesting observations from the WSJ this weekend:

“The market has a problem with the possibility of a Democrat winning, but doesn’t seem to have a problem with the reality of a Democratic president,” says Tom Gallagher, an analyst at economic-research firm International Strategy & Investment in Washington, D.C. Mr. Gallagher also notes that the market tends to do better under Democratic presidents than under Republicans.”

The article (see link below) is chock full of other counter-intuitive observations. Consider, for rexample . . .

Shhhh! Don’t tell anyone — Here’s the full article:

“The klieg lights of the media blitz lit up Boston last week at the Democratic National Convention, where John Kerry was given the official candidacy nod.

While it was all smiles for conventioneers, the popular notion is that Mr. Kerry’s standing in the polls — which show him slightly outpacing President Bush, though in a statistical dead heat for the most part — is a negative on Wall Street, either because of uncertainty over the election’s outcome or because Mr. Kerry’s policies are perceived as less stimulative to the economy and market.

But as this year’s market action has shown, conventional wisdom isn’t necessarily, well, wise. Pundits said strong second-quarter earnings would pump up stocks, but the weak outlooks that came with them have pushed indexes down. Traders expected stocks to get a boost when Iraq was declared “over,” and that didn’t happen.

At the beginning of the year, strategists surveyed by the Online Journal expected a strong first half1 on Wall Street followed by an anemic second half, with many seeing the Dow industrials rising above 11000 by the end of the year. If the first half, when the Dow industrials slipped 0.2%, was considered strong, watch out for the rest of the year.

So what of the perception that Mr. Kerry is “bad” for the markets? Wall Street could once again be off the mark. Even last week, with Mr. Kerry getting generally positive reviews about his first speech as the official Democratic nominee, the Dow industrials rose 1.2%. And the one trading day after Mr. Kerry spoke? The Dow industrials rose just 0.1% Friday, though rising oil prices throughout the week were dragging on equities.

The last two times a Democrat has defeated an incumbent Republican — in 1976 when President Carter beat President Ford, and in 1992, when President Clinton beat President George H.W. Bush — stocks struggled early in the year but rallied after the election.

“The market has a problem with the possibility of a Democrat winning, but doesn’t seem to have a problem with the reality of a Democratic president,” says Tom Gallagher, an analyst at economic-research firm International Strategy & Investment in Washington, D.C. Mr. Gallagher also notes that the market tends to do better under Democratic presidents than under Republicans.

Should Mr. Kerry take the election, Washington may well find itself in a state of gridlock, again. In the past, that has been good for the markets, like it was during the Clinton administration. The Congressional makeup is expected to remain much as it is now, and that means two things:

• Proposals from either side are less likely to come to pass, and many feel that a market and economy left to their own devices perform better.

• Policies Wall Street deems unpalatable — such as Mr. Kerry’s proposal to undo tax breaks for those who make more than $200,000 annually — will have a tough go of it.

“Gridlock means Kerry would not be able to undo the Bush tax cuts, and that’s a persistent concern,” says Greg Valliere, chief strategist for Schwab’s Washington Research Group.

Even if Mr. Kerry were successful in rolling back the tax cuts, it’s not necessarily a strike against stocks — Presidents Reagan and Clinton both took the same measures without damaging the market, though Mr. Reagan was rolling back some of his own administration’s earlier tax cuts. Taxpayers who will see their tax liabilities climb under the Kerry proposal aren’t likely to yank their money from Wall Street even with higher taxes, analysts say.

The Kerry proposal leaves most taxpayers that would be considered upper middle class feeling better about the Democrats and less worried about how higher taxes might affect their bottom line, contrary to the feelings about past Democratic administrations, says Michael Panzner, head of sales trading at Rabo Securities USA, a unit of the Dutch Rabobank Group. “There’s a political sensitivity to it.”

Some also take the position that a win for Mr. Kerry could entice back foreign investors, some of whom took issue with President Bush’s actions in Iraq and lack of cooperation with allies, as well as deficits that have soared under his watch.

Foreign investors looking for stable investments and more consistent returns often turn to U.S. securities, providing a large chunk of capital to U.S. businesses and government. For instance, foreigners control about 40% of U.S. Treasury debt. And with U.S. interest rates on the rise as the Federal Reserve seeks to manage the pace of economic growth, U.S. investments should become more attractive over time. (To be sure, Fed chair Alan Greenspan is unlikely to steer any other way, regardless of the election’s outcome.)

“Because of the United States’ dependence on outside interests to finance our twin deficits, to supply a plethora of consumer wares, and to meet our growing energy needs, the greater risk is that foreigners question what is happening with the U.S. — as well as their own commitments to this country,” Mr. Panzner wrote in a note to clients.

Already, foreign investments in the U.S. have been waning4, with purchases of securities in May, the latest month of data available, sinking 26% to $56.4 billion. That was lowest monthly total in seven months and the fourth consecutive monthly drop.

Mr. Kerry may be seen as more “conciliatory and consensus-oriented” than his opponent, Mr. Panzner said, and foreigners may be more excited about “lending a helpful hand of support to our markets.”

Job growth is another area that has been a nagging problem for Mr. Bush’s administration. While employment growth has picked up in recent months, the White House is still facing some historical odds.

A study by Ned Davis Research found that in past years, when employment growth has risen by less than 5% during a presidential term, the incumbent loses. It happened in 1992, when the elder President Bush was ousted by Mr. Clinton. During Mr. Bush’s term, nonfarm payrolls grew by 1.8%. Under the younger Bush’s watch, nonfarm payrolls have fallen 0.8%.

If he wins, Mr. Kerry will face the same economic conditions in trying to stimulate job growth, and he may be no more successful. He has laid out an ambitious goal of creating 10 million jobs if he’s elected.

The surge in attention to the Democratic platform served Mr. Kerry well this week, but as the campaign heats up and the days draw closer to November’s decision, analysts will weigh all the competing data and come up with a consensus view of where we’re headed.

And as we saw in the first half of the year, whether Mr. Bush wins re-election or not, much of that wisdom may end up seeming, well, unwise.

Source:
Why Some Think a Kerry Win Could Boost the Stock Market
Erin Schulte
WSJ, July 31, 2004 6:30 p.m.
http://online.wsj.com/article/0,,SB109103951994476540,00.html