Election Risks Worry Wall Street

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Forget about the bulls and bears; think elephants and donkeys.

The reason: The midterm elections are only 50 days away and the brokerage community is bombarding the public with repeated warnings about election risks.

The big worry: Given the country’s growing disenchantment with the war in Iraq and the president’s low ratings in the polls (now at around 36%), the pro-business and pro-Wall Street Republican Party, so goes the speculation, stands a strong chance of losing control of the House and perhaps the Senate, as well. And the stock market, some warn, may suffer because of it.

One of latest warnings on political risks came earlier this week from Merrill Lynch’s North American economist, David Rosenberg. The markets, he says, may not be taking into account the potential for a shift in the House, which sets the legislative agenda. He believes “there is a serious risk if the economy slows further, we may see a huge ideological shift to the left this November, which the markets may not be taking into account right now.”

For some thoughts on what the elections are likely to produce for both political parties and investors, I rang up Prudential Equity Group’s eyes and ears in the Capitol, Charles Gabriel, its well-regarded and politically wired-in chief Washington strategist.

Based on his analyses of the polls and his conversations with prominent political pundits, Mr. Gabriel concludes the Democrats will retake control of the House on November 7, but fall short in the Senate.

However, he doesn’t believe this change will have any significant market implications. “You’re not talking about a legislative runaway train, but partisan gridlock and nothing meaningful in the way of new legislation because the Republicans will still control the White House and the Senate,” he says. As a result, he thinks the overall impact on the market will be “more of a cold, than the flu.”

Still, Mr. Gabriel does see potential industry risks.Likewise, he opens the door to some possible legislation, depending, he says, “on how far we go to the left.” Among the industries he views as most vulnerable to Democratic gains are drugs, integrated oil, defense, managed care, and coal. Negative implications are also envisioned for the Bell operating companies, Wal-Mart, and college loan/education services companies.

On the plus side if the Democrats make gains would be housing, alternative fuels, generic drug makers, life insurers, Internet gambling facilitators, content and application companies in the telecom world, Fannie Mae, and Freddie Mac.

If indeed the Democrats do retake the House, our political tracker says it would force the president into a defensive posture as the Democrats would likely push for hearings on the faulty intelligence used to take us to war. In turn, he adds, this would create very noisy and negative headlines about the president.

However, if the Democrats win the House by, say, a six-seat margin, Mr. Gabriel believes it could indicate a Democratic wave in the 2008 Presidential elections, which might create marketwide headwinds and pave the way for the end of the Bush tax cuts and a shift on the war on terror.

Who are apt to be the presidential standard bearers? Mr. Gabriel says at this juncture it looks like it’s Hillary Clinton versus John McCain. If that’s the case, he adds, Mr. McCain, if he can get the nomination, would win because the polls show Mrs. Clinton, in such a contest, would obtain only about 37% of the vote. As such, he says he would not rule out Al Gore as an anti-war candidate and an alternative to Mrs. Clinton.

Because Mr. Gabriel sees the next two years of the Bush presidency as “a prescription for increased gridlock,” an obvious question is how does the market fare in such an environment? There’s not a pressing need for legislation at this time, so any gridlock would be benign, according to Mr. Gabriel. As for the two most recent gridlocks, he notes the market reacted poorly in the 1980s, but did okay in the 1990s.

Interestingly, the gridlock in the 1980s — which arose out of the Iran Contra scandal and occurred during the years of 1987 and 1988 when Ronald Reagan was president — took place in a period that produced one of the biggest stock market crashes in history. That was on October 13, 1987, Black Monday as it’s called, a day the Dow dived 508 points, or 22.7%.

Meanwhile, some political watchers take issue with Mr. Gabriel’s prediction of a House win for the Democrats. The key reason, they say, is the failure of Democrats to present a clear, cohesive and credible alternative strategy to that of the Republicans, especially as it relates to maintaining a tough stance on the war on terror, ensuring strong national security, and creating a sensible approach to the withdrawal of American troops from Iraq. Another Republican plus is said to be the recent fall in gas prices and mortgage rates.

dandordan@aol.com


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