- The Washington Times - Thursday, October 28, 2004

The close race for the presidency is depressing the stock market, which is flat to down for the year despite a recovering economy, solid profits and major new tax breaks for investors.

The clouded outlook for President Bush is being blamed for the market’s woes, along with high oil prices and lingering threats of terrorist attacks and disruptions in Iraq. Some analysts see darker signs in the market’s trend.

The lackluster year for Wall Street’s major stock indexes has come despite a brisk start in January that seemed to bode well, and widespread hopes that 2004 would another year of rebound — like 2003 — from three years of losses.

But initial hopes were dashed by soaring oil prices and an economic slowdown at midyear, leaving the Dow Jones Industrial Average down 4 percent from its 10,410 level on Jan. 2, even after a three-day rally sparked by falling oil prices this week.

The Nasdaq Composite Index also is down about 1.4 percent since January, putting it and the Dow among the world’s 10 worst-performing stock indexes so far this year.

Only the Standard & Poor’s 500 Index, a broader gauge of blue-chip stocks, is up for the year so far by a tepid 1.5 percent.

“Financial markets — and perhaps much of the economy — are frozen in time, suffering from an extreme risk aversion mentality as people try to figure out the political future,” said Lawrence Kudlow of Kudlow & Co.

The same “bubble of fear” that has captured the stock market has taken hold of other major markets that are viewed as safe havens for investors in times of political and economic uncertainty, he said.

Gold and bond prices have been soaring, driving down interest rates, while the threat of disruptions in Middle East oil supplies has helped send the price of crude to records of more than $55 a barrel. Yesterday, premium crude continued a three-day slump and ended at $50.92 on the New York Mercantile Exchange.

With the uncertainty and suspense surrounding the U.S. election Tuesday and the Iraqi election in January, “this is the perfect scenario for speculative hoarding of oil” and flights to safe-haven investments, Mr. Kudlow said.

“More than likely consumer and corporate business decision-making is also being put on hold in advance of a potentially chaotic election,” he said. “Markets are spooked by the possibility of a highly litigious voter recount,” among other scenarios, he said.

The major stock indexes have been good predictors of past election results, analysts say.

Stocks usually rise in election years when the incumbent is winning. The market was up by more than 10 percent in 1996 when President Clinton won re-election, and in 1988 when President Bush’s father, George Bush, won as an incumbent vice president.

The market declined when the first President Bush lost his re-election bid in 1992, and it also fell in 2000, when Vice President Al Gore lost in a cliff-hanger.

“A flat or down market in the 10 months preceding an election can spell defeat for the incumbent,” said Mr. Kudlow, even though today’s investors clearly favor Mr. Bush over his Democratic challenger, Sen. John Kerry of Massachusetts, because of the president’s generous cuts in capital gains and dividend taxes, which are scheduled to expire in the next presidential term.

At the very least, “stocks, like everything else, are signaling a close call,” he said.

Joseph P. Quinlan, chief investment strategist at Banc of America Capital Management, said the market’s worries about Mr. Bush losing the election are overblown.

“The candidates are running neck and neck, triggering some trepidation among investors,” he said. But the market probably would like the divided government that would result if Mr. Kerry wins, he said.

Experience with divided party control over the executive and legislative branches during the 1980s and 1990s showed that more fiscally responsible policies were enacted because the parties were forced to compromise on legislation, he said.

John H. Makin, resident scholar at American Enterprise Institute, said the market’s travails are signaling much more serious problems than a contentious election.

He said the fall in stocks and interest rates this year could foreshadow a fall back into recession in 2005, precipitated by high oil prices and a paucity of demand worldwide for the flood of goods coming out of Asia.

“This year has been perhaps the most surprising year for markets since the March 2000 stock market crash,” because of the market’s unexpected return to the behavior that characterized its three years of post-bubble malaise, he said.

Mr. Makin believes the markets are flashing warnings of a return to recession if the price of oil remains above $50 a barrel through the end of the year.

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