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[TRSM]

The Big Picture Print version



Updated: 01-Nov-04 09:03 ET

Election Issues - Unbelievably Close and a Risk for Stocks

[Briefing.com - Dick Green] There is no avoiding it. The election on Tuesday is by far the biggest issue for the market. There are risks for investors.

Current Status
The table below shows the tracking polls as of the close of Sunday.

Bush Kerry
Zogby 48% 48%
Fox News 46% 46%
ABC/Wash Post 48% 48%
American Research 48% 48%
Rasmussen 48.8% 48.2%
TIPP 48% 43%

Unbelievable. There is almost no need to put headers on the column. Don't let anyone suggest there is any way to divine from these numbers or any other the outcome of this election.

Of course, the election will be determined by state-by-state totals, not the national percentages. After all, Gore received 48.4% of the national vote in 2000, compared to Bush's 47.8%, but lost. The picture amongst the states is just as murky, if not more so, than the national conditions.

Electoral Vote Possibilities
The election will be determined by the results in the following states (with electoral votes in parentheses): Ohio (20), Florida (27), Michigan (17), Wisconsin (10), Iowa (7), Minnesota (10), and possibly New Mexico (5) and New Hampshire (4).

The best way to look at this is to start with Florida and Ohio. Bush won both in 2000. The states he won in 2000 now sum to 278 electoral votes. The analysis is to look at what happens if Kerry wins either.

If Bush wins both Ohio and Florida, he is almost certain to win. The only other states that Kerry might pull into his column are New Hampshire and West Virginia (5). But even if Kerry takes both of those and loses Ohio and Florida, Bush has 269 electoral votes. That would result in a tie. Then, the House of Representatives would decide the election. Each state gets one vote, and Bush has a clear majority there. A tie goes to the incumbent. So, in order to win, Kerry needs Ohio or Florida. However, that still leaves possibilities for Bush.

If Bush loses Ohio but wins Florida, Bush is left at 258 electoral votes (assuming no other switches). To get another 11, he would need to take New Mexico (5) and Iowa (7). He leads in most polls in both. However, if he loses Ohio and New Hampshire, then he would need to take New Mexico and either Wisconsin (10) or Minnesota (10). Both are dead heats. That latter scenario would be another outcome that would result in a 269-269 tie.

If Bush loses Florida but wins Ohio, Bush is left at 251 electoral votes. To get another 18, he would need to take Iowa and New Mexico, which is extremely possibly, and add either Wisconsin or Minnesota. That would add to 22 more votes. Then, if Kerry wins New Hampshire, it would once again be 269-269. Under this scenario, if Kerry wins West Virginia, however, Bush would need to with both Wisconsin and Minnesota.

If Bush loses both Florida and Ohio, Bush is left at 231 electoral votes. To get another 38, he would need to win Wisconsin, Minnesota, Iowa, New Mexico, and Michigan. It is possible, but unlikely. Michigan tends to vote more Republican than it polls, but this is a longshot outcome.

The keys then, as everyone knows, are Ohio and Florida. If either candidate wins both, he is likely to win. There are more possibilities for Bush than for Kerry if they split. That is why most betting sites have Bush as a slight favorite. If Bush wins either, he still needs to just pull in a couple of states that are already leaning towards him or extremely close. In fact, a very possible scenario is that Bush loses Ohio, but wins New Mexico and Iowa. That would result in 270-268 Bush win.

The Impact on the Stock Market
You can prove anything with a collection of data. In our opinion, there is no historical analysis that comes close to determining whether a Kerry or Bush victory would be better for the market.

If you want to prove that the stock market does better under Democrat presidents, just start your analysis with Herbert Hoover. That is what many publicized studies do. If you want to prove Republicans are better, there are other starting places that work.

Furthermore, it is ridiculous to assume that a president necessarily sets economic policy and determines the fate of the stock market. Some presidents have inherited recessions, others the start of booms. The buck may stop there, but it doesn't always start at the president's desk.

Even more importantly, the make-up of congress is a key factor. Congress, after all, ultimately sets tax policy and the budget. For the first two years of the Clinton presidency, the S&P was up 3.5% per year. Upon election of the Republican congress in 1994, the market then went up at nearly a 20% rate for a number of years as the bubble built through 1999.

Does that prove that the Democrat president produced an up market? Does it prove that a Republican congress is the key? Or perhaps it proves that a mix is the perfect answer for stocks.

Our view is that none of these past experiences fit today's circumstances. There is no way to tell whether the market will fare better if Bush wins or if Kerry wins.

There is one scenario, however, that should concern all investors.

The Real Risk
An uncertain election outcome could greatly disturb the stock market. If there is no clear winner on Wednesday, and the election hinges on who has the most lawyers, and what judges will ultimately decide, the stock market may suffer.

The current Tying it Together article notes that in 2000, from the day after the election until the day the Supreme Court heard arguments, the S&P fell 8.1%. EIGHT PERCENT! The entire trading range from the highs of 2004 to the lows of 2004 has been only 9%.

It is our belief that a clean win, for either side, is therefore much more market friendly than an uncertain election outcome. Not only does the market abhor uncertainty, but that will also make for an extremely rancorous congress, and continuing animosity amongst large segments of the population.

The House and Senate
Here, the outcome is much more clear.

The Republicans will retain control of the House. They currently hold 229 seats, the Democrats 206. Most pundits are forecasting little change or a pickup of a seat or two for the Democrats. We have been keeping track of the pundits forecasts over the past ten years, and they typically slightly underestimate Republican strength. Our guess is that the Republicans pick up 2 seats.

In the Senate, the Republicans hold 51 seats, the Democrats 49. Most analysts expect the Republicans to pick up one seat. Our guess is that the Republicans pick up 3. The GOP should pick up Georgia, South Carolina, North Carolina, Louisiana, and South Dakota. The Democrats will pick up Illinois and Colorado.

In any case, the Republicans are highly likely to retain control of both the House and the Senate.

What it All Means
The election is finally here. Thankfully. Hopefully, it will also be over quickly. The fundamentals are excellent for whoever inherits the most powerful position in the world. The economy and earnings momentum are far stronger than generally recognized. After the election, a clearer interpretation is likely to emerge. The data will no longer need to be viewed through political lenses.

If there is a clean win, the stock market is in position for a decent year-end rally.

If the outcome is unclear, however, the market may very well experience significant turbulence.

Dick Green, Briefing.com.

[TRSM]

Election Day - Bullish Undertones: We have long said that the election could provide a bullish impetus to the stock market - if there is a clear winner. The futures indicate a higher open this morning. This reflects underlying bullishness that is hoping to break through if indeed there will be a clear winner.

The final tracking polls at a number from the most prominent pollsters we have consistently followed are as follows: Zogby: Bush 48%, Kerry 47%; Rasmussen: Bush 50.2%, Kerry 48.5%, TIPP: Bush 50.1%, Kerry 48.0%. ABC/Washington Post polling through yesterday was Bush 49%, Kerry 48% but is not yet out with a final number this morning. There is also a new Marist poll that puts the race at Kerry 50%, Bush 49%. For a complete list of polls, RealClearPolitics is a good site. Bush has been stable, or up a bit, in recent days, suggesting that individual news items have had little late impact.

Of course, the national polls aren't the final determinant. It is the state votes that will decide the winner. Here, the outlook is far from clear, but Ohio and Florida will be the key, as discussed in yesterday's Big Picture column. Polls in these states are mixed. There are numerous states that are very close. It will be a late night.

The earnings reports today will have little broad impact. Amerisource Bergen and Emerson had good reports, but they seem small today. Instead, the relief that the election is finally here is palpable. Hopefully, it is without incident, and the lawyers stay home afterward. If that happens, the market can turn to the positive fundamentals.

Earnings growth this quarter will be near 16%. Guidance for the fourth quarter suggests a 15% gain. Economic growth picked up in the third quarter to 3.7%, which is above the long-term trend. Inflation and interest rates remain well below historical norms. And, the speculative aspect of higher oil prices is finally being driven out. We look forward to the emphasis returning to these issues.

--Dick Green, Briefing.com