Hard-to-Read Candidates Keep Wall Street Guessing
Wall Street’s sophisticated minds seem to be having as much difficulty as many average Americans understanding what the presidency of George Bush or Michael S. Dukakis will bring.
Wall Street’s expectations about the coming Administration usually set off swings in the prices of stocks, bonds and currencies in the months before a presidential election. This year, the election’s approach has had precisely no effect--partly because the race is close, but also because Dukakis and Bush have remained steadfastly vague about the issues that most concern investors, such as the federal budget deficit.
“The markets have been trying to figure out what the election is going to mean, but the signals just aren’t there,” says Pedro Verdu, investment manager with the Travelers Investment Management Co. “I’m not sure that’s going to change much between now and the election.”
Such uncertainty puts investors on edge, he adds, because they fear that the new President may take the economy in an unforeseen direction that will suddenly deflate the value of their investments.
Clear Opinions in Past
These pre-election market swings can be dramatic. In 1980, the prospect of Ronald Reagan’s election combined with an easing of interest rates to lift the Dow Jones industrial average 205 points, or 28%, between March and July. Conversely, in September and October of 1976, as Jimmy Carter established a lead over then-President Gerald Ford, the Dow slipped 82 points, or 8%, before recovering somewhat as Ford closed the gap in the final days of the campaign.
The prospect of a presidential election can move bond prices, depending on what investors think the new presidency will mean for interest rates and inflation, the enemy of bond investments. An election can also cause fluctuations in the dollar, depending on whether investors believe that the next President will be willing and able to maintain the dollar’s value against other currencies.
The markets have been quite clear in their views in the past four presidential elections. In 1972, the markets liked Nixon. They felt confident about Reagan in 1980 and 1984, and they were bullish--and wrong--about Gerald Ford in 1976, Verdu says.
Styles Hard to Read
One sign of the markets’ confusion this year was their imperviousness toward Dukakis’ spring surge in the polls. “Dukakis went up in the polls, and the dollar went up,” said Michael Evans, head of an economics consulting firm of the same name in Washington. “Dukakis began losing ground--and the dollar went up some more.”
Wall Street observers say the difficulty in getting a good reading on the candidates’ intentions is partly because of their styles. Unlike his boss, George Bush has never been an ideologue, intent on declaring his commitment to principles; Dukakis, for his part, has been eager to describe himself as a pragmatist.
Dukakis and the Democrats are also eager, as analysts have pointed out, to avoid the kind of specific economic prescriptions that have gotten previous nominees into trouble. They remember George McGovern’s 1972 proposal to distribute $1,000 to each American, as well as former Vice President Walter F. Mondale’s call for higher taxes in 1984.
“It’s the Mondale effect--no matter what you think, you can’t say it,” said David Rolley, an economist with the investment firm Drexel Burnham Lambert in New York.
Some analysts have been waiting for weeks to see the political parties’ platforms, expecting that they would offer some guidance on the future economic path. But the 5,000-word Democratic platform that was approved Tuesday offers little detail about how the new Administration would try to reach its economic goals.
The platform decries the “mortgaging of our children’s future” and cites a need to “use all the tools available to better manage our trade.” But it doesn’t get more specific on either deficit cutting or trade relations.
Answers Sought on Deficit
The size of the federal budget deficit has been a preoccupation of the markets for years because a large deficit means that the government competes with private firms for investors’ cash, and in doing so drives up interest rates.
The vice president says he will balance the budget by 1993 without raising taxes by imposing a “flexible freeze” on federal expenditures that he says will cut $15 billion in expenses during his first year in the White House. But this seems unlikely to work unless interest rates drop and the economy expands more than many on Wall Street expect.
Bush has provided few details of what government activities he considers expendable, but has proposed some expensive new programs, such as a long-term health-care plan.
Dukakis has said he would consider raising taxes as a last resort but suggests that such steps won’t be necessary. The Democratic candidate has said he plans cuts in the military, in farm subsidies and other areas, and he has predicted that better tax collection enforcement could enrich the Treasury by $90 billion over five years.
His plan has also drawn a largely skeptical reaction from the business community, particularly considering his announced plans to spend more on such areas as health care, economic development and child care.
Many on Wall Street expect the new President to be forced to take dramatic steps to deal with the deficit, probably including tax increases.
Susan Simon, a political analyst with the Shearson Lehman Hutton investment firm, says each of the two candidates has advantages and disadvantages. Bush might not raise taxes next year, but he might be unable to work with the Democratic Congress to lower spending; Dukakis might spend more on new programs, but he might also reach a cost-reduction agreement with Congress on other areas, she said.
“It may be sort of a wash,” Simon said.
Wall Street also complains of the difficulty of distinguishing between the candidates on trade policy and the U.S. trade deficit. Dukakis is the more likely of the two to complain about unfair competition from trading partners, and he backed the new law that will give workers advance notice of plant closings.
Yet he has a long reputation as a free trader and has resisted efforts to win his support for high tariffs or other heavy protectionist steps. Dukakis and Bush are both expected to support the efforts of the largest industrial nations to work together to keep their currencies at specified values.
Also unclear is which of the next Administrations would lean more favorably toward efforts to reform the financial markets, says Shearson’s Simon. Nicholas F. Brady, the chairman of the presidential task force that recommended reforms after the October stock market crash, is a close friend of Bush and has been mentioned as a possible U.S. Treasury secretary.
On other issues such as worker’s benefits, health care and the environment, Dukakis is believed more likely to increase costs for government and private employers. As President, Dukakis would also be expected to slow the merger activity that has raged during the Reagan years.
But Wall Street observers say these questions are secondary in the markets’ view to those of the budget deficit and trade. “My worst fear is that we’re going to have the election and we won’t really know more about where these guys stand than we do today,” said Verdu, the portfolio manager. “Then we’ll feel really exposed.”
POLITICS AND THE MARKET
Of the 14 presidential elections since 1900 in which the incumbent parties were victorious, 12 were foretold by rising stock prices-- including the three reelections of Franklin Delano Roosevelt, below. Listed below are the percentage changes in the Dow Jones industrial average from the end of the party conventions to Election Day.
Year Incumbent Party Won % Change 1900 8.3% 1904 22.8 1908 9.6 1916 15.9 1924 6.7 1928 22.4 1936 11.5 1940 9.9 1944 0.8 1948 -0.5 1956 -2.3 1964 4.8 1972 1.5 1984 1.0 Average 8.0
Year Incumbent Party Lost % Change 1912 -1.8% 1920 -9.1 1932 48.6 1952 -2.8 1960 -3.1 1968 5.6 1976 -0.8 1980 1.4 Average 4.8 Excluding ’32 -1.5
Source: Stock Trader’s Almanac
