“When push comes to shove, the investment community doesn’t seem wild about either candidate. It’s a bit like shopping for a used car: You have to settle for flaws if you are going to take one off of the lot. In fact, Merrill Lynch is issuing reports on the benefits of “gridlock” in Washington. This would occur if Kerry were president and the Republicans controlled the House or Senate or both. Neither side would be able to steamroll the other. Sanity often prevails in an environment that demands compromise.”
So says Barron’s, the conservative yet curmudgeonly weekly, published by Dow Jones. The pragmatic financial paper is known for taking up often contrarian viewpoints, and its not surprising that their take is refreshingly clear eyed about the warts on both candidate:
“Wall Street is pretty much divided on the two candidates. The general thinking is that Bush would be good for stocks, with his tax cuts stimulating economic growth, while Kerry would be beneficial to bonds, because his focus on reducing the deficit could keep interest rates down.
That analysis, if correct, suggests a dramatic reversal of the historic roles of the Democratic and Republican parties.
Recent studies show that Democrats traditionally have been far better for stocks and Republicans better for bonds. Over the past 61 years, Merrill Lynch found, stocks averaged a 12-month total return of 13.6% when Democrats were in the Oval Office, versus 11.7% under Republicans. Bonds returned an annual 9.5% under Republicans, versus 2.8% under Democrats.”
Kerry also has several top economists, including Nobel laureate Paul Samuelson of MIT (who has been highly critical of the Bush’s tax cuts), and of course, Princeton Economics prof Paul Krugman, supporting his proposals.
Here’s how their economic and tax policies break down:
What They Would Do
|INCOME TAXES|| Make permanent his across-the-board cuts, due to
expire in 2011
|Raise the rate for the highest income bracket to 39.6% from 35%, and the rate for next highest bracket to 36% from 33%||Congressional Budget Office says Bush’s cuts will create a $2 trillion budget deficit in 2014. Kerry’s hikes could help pay down the deficit but, if timed poorly, might slow growth|
|CAPITAL-GAINS AND DIVIDEND TAXES||Make earlier cuts permanent, with 15% as the top rate for both; the cuts are set to expire in 2006. Bush ultimately wants to eliminate both taxes||Has yet to spell out a position, but a key advisor, Roger Altman, says Kerry should consider increasing both taxes for individual filers with incomes of more than $143,500||Economists fret that a hike would depress stocks and erode corporate confidence. Capital gains were taxed at 28% under Bill Clinton, dividends at a maximum of 39.6%|
|SPENDING||Reduce spending increases from the current 6% a year to under 4%. Together with economic growth, Bush says, the cuts will halve the budget deficit within five years||Halve the deficit in four years by raising taxes on the rich and reducing wasteful spending. He would reduce the number of political appointees and ask Congress for line-item veto power||Critics call Bush’s vision wildly optimistic. Kerry, too, would have to prove he’s serious about cutting spending; by some estimates his new programs would increase spending by $165 million|
|TRADE|| Talks like a free-trader, yet didn’t hesitate to impose
tariffs that benefited domestic steel producers
|Sounds like a staunch protectionist but has voted for every major free-trade agreement. Has proposed targeted tax-cuts for companies that avoid outsourcing jobs overseas||If foreign investors perceive a rise in protectionism, then they might dump their holdings here in anticipation of slower growth. That could depress the dollar and contribute to a rise in import prices and interest rates|
|SOCIAL SECURITY||Privatize a portion of the program for younger participants. They’d receive less directly from the federal government upon retirement||Says no reform is possible unless government curbs the budget deficit, adding that his tax increases for the rich will generate enough revenues to preclude future cuts in Social Security benefits||Many economists say that Social Security cannot survive unless payouts are reduced by raising the retirement age to at least age 72 to reflect longer life spans and extended careers. Neither candidate wants to talk about this emotional issue|
|STOCKS||His emphasis on tax cuts could spur growth and boost the market||His tax hikes could create a drag that sends the stock averages lower||Historically, Republicans stood for deficit reduction. This contest reverses the roles of the parties|
|BONDS||His focus on fiscal stimulus could heat up the economy and force the Fed to raise rates. Bonds would suffer||His deficit-reduction program could keep rates lower, a plus for bond investors||Under Kerry, the optimal investment portfolio might be as much as 64% bonds|
|FED CHIEF||Greenspan redux, assuming the Fed chairman doesn’t retire to write his memoirs. Fed Governor Ben Bernake is a possible replacement||Robert Rubin’s name keeps popping up, but he’s already got a good gig at Citigroup. Former Fed Governor Alan Blinder is more likely||Peers consider Bernake and Blinder to be highly capable. Either one could fill Greenspan’s shoes|
Source: What They Would Do
Final Thoughts: In my own personal experiences in NYC (as an independent), I have found that the financial community is not very anti-Kerry (Anti-Dean, yes). There are lots of Wall Street Democrats, and they have been big Kerry contibutors.
I have also been hearing about gatherings of “former Republicans,” with a high percentage of Wall Streeters in the mix.
As Spalding Gray once said, “I don’t live in the United States, I live on a small island off the East coast of America.” He was referring to New York City, and the fact it is hardly representative of the rest of the nation. So take my anecdotal observations of NYC poltical chatter with a grain of salt — your mileage may vary.
However, with so much of Wall Street’s personnel and wealth concentrated here, the viewpoints of the Financial Community in the city may certainly be a significant factor in the 2004 Presdiential election. At the very least, the fundraising portions of it.
And as the chart above makes plain, Kerry is not the disaster his opposition is attempting to define him as. Indeed, one can argue that while Bush would be better for the stock market, Kerry would be better for the entire economy as a whole.
The mere fact that Barron’s is on the fence is something that the White House political strategists, after getting tax cuts in capital gains, dividends, and the top brackets, cannot be all to happy about.
And, November is still along ways away.
Which party is better for the markets? Kerry and Bush are changing the rules
Barron’s, March 15, 2004
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