Waiting for the Other Shoe to Drop
By GRETCHEN MORGENSON
s the nation waits to hear exactly what
the American people said when they
"spoke" last Tuesday, investors' voices are
coming in loud and clear. Stocks tumbled at
the end of last week as the whiff of a
constitutional crisis began wafting out of South
Florida. The Nasdaq lost 12.2 percent of its
value for the week, while the Dow Jones
industrial average fell 2 percent. The Nasdaq
is down 25.6 percent this year.
An election in the balance is about the last
thing stock market investors want. It is bad
enough that the nation's economic growth is
slowing considerably and that corporate
earnings have been so disappointing. Dell
Computer added its name to the pile of former
glamour stocks whose managers have forecast
lower growth in coming months. Its shares lost
19 percent last week after the news.
It wasn't supposed to be this way. Many
equity investors had assumed that the market's
rallies in the past couple of autumns would be
prologue, and had expected a year-end jump.
But those hopes were too rosy by half. As
Louise Yamada, head of technical research at Salomon Smith Barney,
pointed out, the stock market has rallied in the months after a presidential
election only about as often as it has declined. In the 28 election cycles
since 1888, she said, the overall market rose 57 percent of the time and
fell 43 percent of the time from Election Day until the end of the year.
And Ms. Yamada said she believed that a sustained rally was especially
unlikely this year, even before the mess in Florida started to unfold. She
has suspected for months that the 18-year bull market was beginning to
unwind and that investors should prepare for several years of flat returns
from the Dow.
"The market was already fragile," Ms. Yamada said. "I don't think what's
happening to stocks is the result of the election, but it is certainly not
helping."
The question on many people's minds is how the nation's financial
markets will respond to an escalation of what is already an ugly political
brawl. The vow of the Al Gore camp to fight the Florida results in court
was very unnerving.
"I'm amazed the markets have handled it as well as they have," said
Charles A. Gabriel, senior political strategist at Prudential Securities in
Washington, on Friday. "Now we have to go through a weekend news
cycle that will be very painful, with the threat of insurrection and
illegitimacy claims."
Another wild card is how foreign investors will view the interparty
bickering. The Securities Industry Association estimates that foreign
investors' net buys of United States stocks could exceed $194 billion this
year, up from $107.5 billion last year. That the overall market has fallen
in spite of such buying shows how vulnerable stock prices are to falling
foreign demand.
The final presidential vote count, including absentee ballots, will not be
concluded until Friday. That leaves an awful lot of time for warfare
between the Democratic and Republican camps to get even nastier. If it
does, stocks will probably experience further gyrations.
Richard Sylla, professor of financial history at New York University's
Stern School of Business, said he believes that neither candidate wants to
do anything that will damage the country. And if the count goes to
George W. Bush, he thinks that Mr. Gore will be gracious. "The longer
Mr. Gore has his people out questioning the results of the election, the
more damaging it is to his own political future," he said.
Mr. Gabriel thinks that investors may hold the key to what ultimately
happens in election 2000. "If the market ever gets to the point where it
feels it needs to have a tantrum to send a signal to the two parties to end
this, that's when you will come to a conclusion," he said. "American
politicians today are very, very cognizant that 48 percent of American
households own stocks."
He added, "What an incredible election cycle this would end up being if
investors have to cast the final vote." |
