How the Foley Scandal Could Hurt the Stock Market
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.
Add a sex scandal to the impending battle between the donkeys and elephants. Importantly for the nation’s 78 million stock players, it could change the political dynamics, significantly affect the upcoming elections (now 29 days away) and have major market implications.
In fact, the scandal, known as the “Foley fallout,” is already influencing stock activity. For example, money manager Raymond Stahler of London-based Stahler, Dearborn, Ltd., and a bull on energy stocks, did an about-face over the past week by lightening up on his holdings of Chevron, Marathon Oil, and ExxonMobil. He also unloaded some shares of pharmaceutical biggies Wyeth and Pfizer, even though he says both are undervalued.
His reasoning, he told me, was chiefly political. He expects that the Democrats will take control of the House in the midterm elections and have an outside shot of grabbing the Senate, as well. As a result, he thinks both energy and oil shares could come under heavy pressure.
Actually, Mr. Stahler began selling these stocks a few months ago because of his political concerns. In the past week, though, he stepped up his sales in some of the same companies. “Because of the Foley affair, the chances of my being right about the Democrats have greatly increased,” he says.
The Foley affair centers on Rep. Mark Foley, the Republican who was caught up in a sex scandal involving congressional pages. Adding to the pressure on Republicans are calls for the resignation of the speaker of the House, Dennis Hastert, amid allegations that he was aware of Mr. Foley’s sexual interest in the pages. (Mr. Hastert has denied the allegations and said he wouldn’t resign.) Adding further to Republican woes are the troubles of Senator Allen of Virginia.
“Some friends in New York tell me I’m making a mountain out of a molehill, but I don’t think so,” Mr. Stahler says. “I think the market could suffer a lot more than people might imagine if the Democrats achieve meaningful gains in the election — which I’m sure they will. And if they win both the House and Senate, which I now believe is a distinct possibility, I think that could stall or beat up the market the last two months of the year.”
Among legitimate matters of market concern he points to if the Democrats do make substantial headway in Congress:
• The Bush tax cuts may not survive going forward.
• The prospects of a windfall tax for the energy industry.
• Pricing pressures on drug companies.
• Significant cutbacks in defense expenditures.
• An accelerated pullback from Iraq.
• The possibility of a big shift to the left.
Mr. Stahler says he’s not oblivious to the possible uses of presidential vetoes, but notes that any sizable Democratic gains would invariably create a lot of noise and worry, which, he observes, could produce a period of declining stock prices and pressure on a number of key industries.
The key political question, of course, as far as the market goes: What are the chances of the Democrats snaring both the House and Senate?
The politically wired-in chief investment strategist of the Prudential Equity Group, Charles Gabriel, had figured the Republicans, given the president’s improved poll numbers in September, stood a good chance of retaining control of both the House and Senate. But no more, he says; the Foley scandal — “which is a major, major problem for the Republicans” — has changed all that.
Based on his latest analyses — which include discussions with leading political pundits and pollsters — Mr. Gabriel has raised the odds of the Democrats capturing the House to 60% from 55%. Likewise, he has boosted the odds of their gaining control of the Senate to 45% from 33%. Overall, he gives the Democrats a 40% chance of winning both, up from 30% a few months back.
The University of Virginia’s professor of politics, Larry Sabato, describes the Foley fallout as a disaster for the Republicans. “If the elections were held today, the Democrats would win the House and fall just short in the Senate,” he believes. “There’s no question,” he says, “that the scandal has altered the dynamics of the election.”
The chief investment strategist of regional brokerage biggie, D.A. Davidson & Co.of Great Falls, Mont., Fred Dickson, minimizes market risks arising from a change in political control in both the House and Senate.”If there was going to be a significant market impact from the Foley fiasco, I think we would have already seen it in recent days,” he says.
However, if indeed the Democrats manage to win control of both the House and Senate — which he now regards as a possibility — Mr. Dickson is not ruling out a market impact. But he thinks it would be a minor backlash, say a 1% to 2% decline in the market averages, not a waterfall event. Far more important, he says, are the actions of the Fed, earnings performances, and what’s happening in Iraq.
Still, he thinks if control of both the House and Senate fall into Democratic hands, “the energy, defense, and drug sectors would be put through the wringer like never before.” And that, he believes, could be a significantly negative market influence.