Insight--S&P:"How Stocks & the Economy Could Tilt the Coming Election"
personalwealth.com
>>>Thursday July 13, 2000 (3:31 pm ET)
By David Etheridge, S&P MMS
NEW YORK, Jul. 13 (Standard & Poor's MMS) - While Fed policy remains the primary focus for the U.S. markets, the presidential election will start to draw more interest as the Democrats and GOP hold their respective national conventions next month.
The outcome of this November's face-off between GOP contender Governor Bush and sitting Vice President Gore on the Democratic side will obviously have market implications. The two candidates differ regarding policy on Social Security reform, debt reduction, tax and spending initiatives related to estimated Federal budget surpluses, and likely Fed appointees as well.
President Clinton made the economy's weak performance and voters' sense of well-being the successful rallying cry of his original election campaign in 1992. But a recent Gallup poll showed voters giving Bush a five point lead over Gore in responding to the question, "Who would be better able to continue the 'good economic times'?"
Online political newsletter Hotline shows Bush with an sizeable (yet early) lead in terms of Electoral College votes based on polls since March. Moreover, Bush holds a 5 point lead over Gore in terms of a winner-take-all for the popular vote, according to the University of Iowa's Electronic Futures Market (IEM), which trades real money on election outcomes.
And yet election forecast models based on macro-economic inputs still give Gore a slight edge over Bush in terms of the popular vote. These models find their origin in the work of Ray Fair of Yale University, who studied all-two party presidential elections since 1916.
S&P DRI has its own derivative of this model with the added feature of a "fatigue" factor - i.e., voters grow weary of the same party being in power too long. The DRI model primarily depends on the change in real per capita disposable income as people largely vote their pocketbooks. The model since 1948 has a decent track record, only missing two elections - Carter over Ford in 1976 and Nixon over Humphrey in 1968.
The S&P DRI model currently pegs the election at a slight tilt towards Gore with a projected 51% win of the popular vote. However, that is assuming that real disposable income grows at least 2.5% in Q3 with inflation around 2.6%. If growth is one percentage point lower, however, the election would swing to Bush.
Stock selection
Finally, an alternative election predictor focuses on the wealth effect from the stock market. The performance of blue chip stocks in terms of the DJIA have been a good leading indicator of voter intentions in election years when an incumbent president was not up for re-election. In those years, the presidential party usually stays in power if the Dow performs well.
That happened in 1908, 1928 and 1988 when the blue chip average gained over 52%, 27% and 9% respectively. Yet, in election years when the DJIA underperformed, control of the White House changed parties.
So far this year the DJIA is down 6.6%, and off 9% since its January peak at 11.750, but has recovered over 1000 points since its March lows. This compares with an 18% rise in 1996 (through the end of October) when President Clinton was re-elected.
For now, a lagging DJIA leaves Gore at risk. Yet a summer rally, if sustained, may close the gap with Bush -- barring renewed Fed fears or slowing corporate profit growth.<<< |
