Voters may be prepared to tune out the stump speeches of George W. Bush, the position papers of Al Gore, and the endless ads of both parties. But investors ought to pay close attention. The financial markets certainly are.
The promises made to voters, the stands on issues such as national defense and insurance payments for prescription drugs, and the proposals and counterproposals on how to spend the current budget surplus all have the potential to move stock and bond prices.
Long before the first votes are cast in November, the financial markets will have picked electoral winners and losers in the drug, defense, telecommunications, and technology sectors.
Changes in interest rates, and in the overall stock market indexes, will deliver the financial market’s own vote of confidence on the fiscal policies of the two candidates.
Investors have had months to get into the habit of paying attention to presidential-election-year politics. Anyone trying to answer the big question of 2000 — when will the Federal Reserve stop raising interest rates? — has had to take the November election into account.
The consensus prediction that the Federal Reserve would put its inflation-fighting campaign on hold after its June or, at worst, its August meeting rested in large part on the belief that the bankers wouldn’t want to be seen as meddling in politics.
Now it’s time to dial in on the specific declarations that Gore and Bush make as they curry favor with key blocs of swing votes.
If the race is close enough to force an escalation in promises, the election could well move sectors of the stock market in which the Democratic administration has staked out strong positions — positions that Bush might alter.
Consider pharmaceuticals. Stocks like Pfizer and Merck were real laggards in 1999 — down 18 percent and 8 percent, respectively — in part because investors feared President Clinton wanted to impose drug price controls as part of a plan to have government insurance cover the costs of prescriptions.
Although the sector has rallied a bit this year, it continues to go into a shocked retreat whenever someone whispers, “price controls.”
The approach to paying for prescription drugs advocated by the Republican majority in the House of Representatives — and by many Senate Republicans, too — would sidestep governmental price controls by encouraging private insurance plans to offer drug coverage.
Few observers give the Republican scheme much chance of working; there’s good evidence that private insurers won’t embrace it.
But anyone who has watched the legislative process in an election year knows that congressional Republicans, just as Democrats have done in other years and on other issues this year, are really just trying to cover themselves among senior voters.
From this point of view the key question is: Is the strategy good enough to help Bush win such key senior-dominated states as Florida and North Carolina, and for members of Congress to win re-election? Or will the Republicans have to raise the ante by offering voters something more ambitious?
A political bidding war that keeps the possibility of price controls alive won’t be good news for drug stocks.
The Republicans hope to return the favor on defense. Republicans accuse Democrats of being soft on defense almost out of sheer reflex. Some years it works — remember how silly Michael Dukakis looked in a tank? — some years it doesn’t.
This year, the Republicans hope they can force a Clinton veto of the Star Wars anti-missile shield and then use that to paint Gore as spineless. A decision to move ahead on the system, unproven as it may be, or a Gore proposal to increase defense spending in other areas to show he’s a true patriot would be good for defense stocks.
Clues to the likelihood of a political bidding war can often be found at the grass-roots level. The high cost of prescription drugs plays well nationally and is a major hot button in a few key states. That combination makes it almost certain that the topic will get plenty of attention from the candidates and their surrogates.
By comparison, the mathematics of the electoral college has made defense policy less significant. It would probably be a bigger issue if Bush didn’t already have Texas, a major defense-contractor state, in his pocket.
Now that the race in California is becoming tighter, expect to see Bush or Gore touting his belief in a strong national defense by making an appearance at a weapons plant outside Los Angeles.
This same lack of a natural electoral constituency also makes it unlikely that antitrust policy in the telecommunications and technology industries will make it to the front burner.
The Clinton Department of Justice has been more activist in this area — blocking the merger of WorldCom and Sprint, for example, and seeking the breakup of Microsoft — than a Bush administration Department of Justice would likely be.
But it’s hard to see how either side could turn this issue into a political lever on a national scale. Stocks like Microsoft and Sprint might get a bounce from a Bush victory, but they won’t benefit much from what’s said during the campaign.
On another front, Bush and the Republicans have wagered that some form of huge tax cut is a winning issue for them. They’ve talked about ending the estate tax, eliminating the marriage penalty and cutting the general income tax rate.
Behind each of these proposals, of course, lies the assumption that voters won’t be able to resist a chance to put dollars in their pockets.
So far, the Democrats have resisted being drawn in. In lieu of one-upmanship, Democratic leaders in Congress and candidate Gore have offered a smaller bonanza while stressing the need for fiscal responsibility, paying down the debt and preserving Social Security.
This in turn has forced Republicans to defend their own fiscal credentials and even to take billions in cuts off the table some weeks (before adding them back the next).
You can bet Democrats will change their tune, though, if pollsters at Gore headquarters detect that Americans want a tax cut.
And that would make Alan Greenspan and the rest of the Federal Reserve even more nervous than they are now.
In recent speeches and testimony, the central bankers have stressed the need to preserve the surplus. Increased government spending and/or a tax cut would stimulate the economy just as the Fed’s leadership is waiting to see whether the interest rate increases it has made to date have succeeded in slowing growth.
The mere concept of a nervous Federal Reserve could be enough to send the bond and stock markets scrambling for cover. Again.
