Uneasy investors scrutinize candidates

Massachusetts Gov. Michael Dukakis and Vice-President George Bush have something in common besides their front-runner status in the presidential election: They are both under careful scrutiny by a financial community concerned about their stands on issues like inflation, mergers, income taxes, the United States budget and trade deficits, and - after last week's Supreme Court ruling - taxation of municipal bonds. Wall Street, it seems, doesn't like what comes after presidential elections.

In four of the past five of these elections, the stock market has done well during the election year and promptly headed south in the first year of the new term. That happened in 1968, 1972, 1976, and 1980. In each of those elections, observes James Stack, a technician who publishes InvesTech, a market newsletter, a bear market arrived within months of the presidential election.

The only exception was 1984, when the US was in the midst of a bull market that was to last until last October.

If the first year of an administration is often bearish, argues Mr. Stack, the last year of a four-year term tends to be bullish, as incumbents loosen fiscal and monetary policy to look good to the electorate.

``The argument has usually been that it's best to be in stocks before the election and in bonds afterwards,'' says Susan C. Simon, chief political economist at Shearson Lehman Hutton. New administrations, she explains, usually feel it necessary to take unpopular actions such as raising taxes, or, in the case of the Federal Reserve Board, tightening money supply growth, as quickly as possible to get distasteful steps out of the way before the next election cycle.

``The October market crash has changed all that,'' Ms. Simon says. Such a pattern, if there is in fact an election-year cycle, ``was thrown off course by the action of the Fed late last year.''

Before October, Simon points out, the Fed had been moving to tighten credit. But the Fed had to open the money gates after the market plunge. That means that now - given an increasingly tight labor market and concerns about inflation - the Fed is feeling pressure to move to a less accommodative stance.

Moreover, Simon observes, ``Congress and the White House have little flexibility'' to fund major new public policy initiatives this year, given tight fiscal resources stemming from the US budget deficit.

Still, she says, there are concerns about what happens after November. ``The market would be particularly uneasy about a tax increase,'' she says. That concern would rise if a Democrat, such as Mr. Dukakis, is elected.

But Dukakis is not alone in raising anxieties within the investment community. There is also unease about Mr. Bush's ``adamant position about not raising taxes,'' Simon says. To some observers, she says, ``the Bush position'' is a scenario for ``White House-congressional stalemate,'' a course Wall Street dislikes.

There may be a pattern about recent election years being somewhat bullish, followed by a bearish post-election year, but the first part of the equation seemed less than obvious last week.

The week was marked by concern about higher oil prices and inflation. Oil prices rose in reaction to the US action in the Gulf, but settled down after evidence mounted that supplies wouldn't be disrupted.

Then they rose again. News that the nation's factory use had fallen somewhat was not enough to offset a slight increase in interest rates. Corporate earnings reports were upbeat. Still, the market remained sluggish, with the Dow Jones industrial average closing up 1.16 points at 2015.09.

Clearly, the excitement on Wall Street last week was more evident on the political and judicial front. Wednesday's Supreme Court decision on state and local government bonds is a case in point. The municipal bond markets were thrown into turmoil when the high court ruled that Congress can tax all interest on such bonds. The consensus, however, is that Congress is unlikely to take such a step, and particularly not against already-issued bonds.

How seriously does the investment community scrutinize the positions of the candidates? ``Very much,'' says Susan Lynner, a vice-president at Prudential-Bache Securities. Some securities firms run frequent ``intelligence'' reports on the candidates, as Prudential-Bache did recently.

``If you study the stated positions of each candidate singly,'' Mark L. Melcher of Prudential-Bache Securities wrote in a recent report, ``their utterances are like Chinese food; you are hungry a few hours later.'' But taken together, Mr. Melcher says, there are great differences between Dukakis and Bush that would have an obvious impact on federal policy - and thus the market.

But in the long run, Melcher says, ``presidents eventually abandon their finely crafted election-year position papers and follow their instincts and convictions.''

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