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Jewish World Review Nov. 14, 2000 / 16 Mar-Cheshvan 5761

James K. Glassman

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The Election and the Market --
ATTRIBUTING the short-term performance of the stock market to a single factor is a risky business. The truth is, we can't ever tell for sure why stocks go up or down over a day, a week or even several months. And, of course, it is never just one thing.

But twice this year, I have made the claim - both on my web site and in op-ed pieces in The Wall Street Journal - that particular political events may be affecting the market - both high-tech stocks and Old Economy ones as well. I have no doubt that this is true, though I can't assign a precise value to how much of the movement of the market is politics, how much is the decline of the euro, or the rise in oil prices, or any other factor.

On April 6 in the Journal, my piece, headlined "Is Government Strangling the New Economy?" made the case that the government's decision to seek a breakup of Microsoft and the court's concurrence was a major reason for the fall, not only of Microsoft's own stock, but of the Nasdaq as a whole - which ultimately dropped about 40 percent from its March high. I am not the only one who has made this connection. My colleague at the American Enterprise Institute, Tom Hazlett, has found that adverse antitrust actions against Microsoft, going all the way back to 1990, have hurt high-tech stocks as a whole - even the stocks of Microsoft's antagonists. In September, Microsoft won a favorable judgment from the Supreme Court, which sent the case back to an appeals court that had ruled previously in Microsoft's favor. Since then, Microsoft's stock has risen - though higher earnings in the third quarter played a big role.

My opinion in April stands: The reason stocks tumbled in April was that it became clear that, under the antitrust regime established by the Clinton administration, political intervention would increase in the largely unregulated, booming high-tech sector. The High Court ruling did not change that, though something else might.

This brings us to my second position on politics and the market, which is criticized by Dave Englander in the Nov. 20 issue of The American Prospect.

In a piece in The Wall Street Journal on Sept. 21, I argued that the increased likelihood of an Al Gore presidency, along with a Democratic House and possibly even a Democratic Senate, was spooking the market. I noted that investors like divided government (one party controlling the White House, the other controlling at least one house of Congress) since "gridlock is good." I calculated that, over the past 24 years, the average annual rise in the Dow under divided government was 23 percent while the average annual rise under one-party government was just 2 percent. I also quickly said that it would be foolish to conclude that divided government accounted for all of the powerful movement in the market but that the importance of a 10-1 ratio could not be denied.

My point was simple. Starting after Labor Day, the stock market had been falling. It was precisely at that time that the polls were showing that Gore's post-convention lift was no fluke and that Democrats appeared to be gaining in House and Senate races.

But Englander says that, "as George W. Bush's standing rose in October, the stock market tumbled." Therefore, my thesis is incorrect. But perhaps Mr. Englander suffers from an early deadline. In fact, after suffering for six weeks, Bush began to rise again in the polls, precisely after the third debate in mid-October. For example, in the three-day Gallup tracking poll from Oct. 9 to 11, Gore led Bush, 45 percent to 44 percent. But in the tracking poll from Oct. 16 to 18, Bush led Gore, 49 percent to 39 percent.

Since then, Bush has never looked back. The stock market has displayed its usual day-to-day volatility, but the trend is clear. The Dow Jones Industrial Average, for example, peaked around Labor Day at about 11,300, and then dipped below 10,000 in mid-October. On Nov. 1, the Dow closed at 10,900 - a move of nearly 10 percent. Similarly, the Nasdaq 100 - the 100 largest stocks in that tech-heavy index - rose 10 percent in a two-week period after falling nearly 30 percent from Labor Day to mid-October.

What do these figures portend? My strong belief is that a Bush victory will be highly beneficial for the stock market - for reasons that go back to my April column. Without Bush, we might well suffer a "regulatory recession," as political intervention in the New Economy increases under a Gore administration, which, if anything, should be more meddlesome than a Clinton administration.

Has a Bush victory already been priced into the market? I think not. There should still be plenty of upside left. The other question, which is tougher to answer, is whether a Republican sweep will be greeted with joy by the market. I just don't know. Divided government may, theoretically, have been a better result for investors, but the list of far-left committee chairmen if the had Democrats taken the House is frightening (it began with Rep. Charles Rangel as head of Ways and Means). Also scary was the possible elevation of two staunch protectionists - Rep. Richard Gephardt as Speaker and Rep. David Bonior as House Majority Leader. We'll see.

JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.


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