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Commentary > Sivy on Stocks
Stocks: What the election means
Bush is better for stocks in the short run, but the only real risk is an inconclusive election.
November 1, 2004: 6:57 PM EST
By Michael Sivy, CNN/Money contributing columnist

NEW YORK (CNN/MONEY) - A week ago, this column took a look at the stock market as a bellwether for the election.

Last Monday, the Dow was at 9,750, down from 10,080 at the start of October. Since a drop during the last month before an election has historically been a good sign for the challenger, it looked as though the momentum was slightly to Senator Kerry.

During the past week, the Dow has rallied strongly, although it is still 26 points short of breakeven. Technically, that's a minuscule Kerry lead with the momentum to President Bush, but it's close enough to count as a simple tie.

The preelection readings are equally conflicted. Bush has maintained a lead of up to two percentage points in national polls ever since the third debate. But Kerry and Bush are tied in many of the close states, and the impact of huge numbers of newly registered voters is impossible to call. So a Kerry victory is almost equally likely.

What does this all mean for the stock market? The conventional wisdom is that a Bush win would be bullish for stocks, while a Kerry win would be bearish for stocks but bullish for bonds.

Go beyond that, though, and the possibilities become highly complex.

First of all, there are really four possible outcomes -- a clear Bush win, a clear Kerry win, a very close race that takes a day or two to decide, and a contested election. It's also important to note that a Kerry administration would likely be restrained by a Republican Congress.

One thing we know with a fair degree of certainty: A contested election that remains undecided for weeks would be very negative for stocks.

In the unlikely event that the Democrats win both houses of Congress, stocks might also sell off substantially on fears that the Democrats would have a free hand for tax-and-spend policies.

By the same reasoning, if the race is decided quickly and Republicans retain both the House and Senate, as expected, the two biggest risks facing stocks will be gone. Share prices should rally, and some analysts think that could be worth as much as 400 points on the Dow.

Bush vs. Kerry

There are plenty of arguments for why Bush should be beneficial for stocks over the longer term. He wants to make his tax cuts permanent. He might explore replacing part of the income tax with a sales tax. He favors raising ceilings on contributions to tax-deferred accounts. He would like to privatize part of Social Security. He will likely ease regulation and may try to cap damages for some types of lawsuits.

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Kerry, on the other hand, will roll back tax cuts for the wealthy, and might very well have to increase taxes on households earning less than $200,000. Kerry plans to reverse or limit the reduction in tax rates for dividend income. And he will be more tolerant of regulation than Bush would be. None of those things will likely help stocks.

But it's a mistake to read too much into those differences. The market is so complex that lots of cross-currents could come into play.

A key thing to remember is that share prices are running at least 20 percent below the historical average for a stock market recovery. As a result, any unexpected good news could trigger a rally in the Dow to above 12,000. Conversely, of course, an unexpected recession could depress the Dow below 8,500.

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Given the favorable economic fundamentals, a recession doesn't look very likely. Economists generally foresee the recovery continuing another couple of years.

Potential positives in a Bush administration include an eventual improvement in the Iraq situation, as well as a drop in the price of oil over the next 18 months as more supply comes on stream.

But a Kerry administration could also have some positive surprises. Higher taxes might narrow the deficit, reducing inflation pressure and keeping interest rates down, thereby prolonging the recovery.

In addition, some analysts think that Kerry would tap the Strategic Petroleum Reserve and pursue a less aggressive Middle East policy that would bring the oil price down even faster.

Beyond that, there are only a few sector arguments that have any real factual support. There is some evidence that the electric utility indexes would respond positively to a Kerry win, presumably on hopes that his policies would help hold down interest rates. Health-care stocks would react better to a Bush win, because of fears that Kerry policies would reduce industry profitability.

Beyond that, it's hard to handicap individual sectors. Overall, a cleanly decided election and a continuation of the status quo in Congress would be most bullish for stocks.

It's really the economy that drives stock prices -- and the outlook there is fairly positive, no matter which major candidate gets to hear Hail to the Chief.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday and Thursday.  Top of page

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