Political uncertainty heightens Wall Street anxiety
As if a recession, falling home prices and solvency of the banking system aren't enough to worry about, investors are now dealing with another potential stock market depressant: political risk.
What looks like a three-person race for the White House between Democrats Hillary Clinton and Barack Obama and Republican McCain is turning out to be a tight one. Mitt Romney, McCain's main rival, quit the race Thursday.
Angst is rising as Wall Street braces for potential major policy changes that are not deemed investor-friendly. "The election is another headwind," says Daniel Clifton, head of policy research at Strategas Research Partners.
Stocks struggled this week, giving back nearly all the gains a week earlier when the market had its biggest weekly gain in five years. The Standard & Poor's 500 index is now down 9 percent for 2008.
Uncertainty over who will win in November makes it difficult for investors to bet which stocks may benefit - or be hurt - by the proposed policies of the next president, says David Kelly, chief market strategist at JPMorgan Funds.
The perception is that Republicans, who tend to be more fiscally conservative, are better for the stock market. But stocks actually have performed better under Democratic presidents. In general, the market does best when there are checks and balances on Capitol Hill and one party does not control Congress and the White House, notes S&P's Capital IQ, citing data from 1952 through 2007.
Perhaps the biggest concern: President Bush's 2003 tax cuts, which lowered rates on capital gains and dividends to 15 percent, won't be renewed when they are set to expire at the end of 2010. McCain said he plans to extend the cuts, but both Democrats said they are likely to let at least some of the cuts expire.
Don Luskin, chief investment officer at TrendMacro, fears the Democrats will eliminate the lower tax rates before they expire. Higher tax rates reduce the after-tax returns of stocks, making them less-attractive investments. An analysis by Clifton suggests stocks could fall by as much as 10 percent if the capital gains tax rate returns to 20 percent and dividends are taxed at a person's normal income bracket.
Luskin says that with both Clinton and Obama having a good shot at defeating McCain, there is concern on Wall Street that Democrats will pursue anti-growth strategies if they capture the White House. He says Wall Street quakes at Clinton's proposal to freeze adjustable-rate mortgages for five years.
The battle over the Senate is also a worry, says Clifton, since the Democrats could capture 60 seats, which all but assures they can pass a bill. "The real key is how the Senate is made up," he says.
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