That bottom-line assessment is based on both policy differences between the two candidates, and on the sheer role of risk and uncertainty.
Higher risk, lower price
Investors around the world are chary of seeing Senator Kerry in the Oval Office. Taxes will be higher, incentives lower -- though, as "Bottom Line" has previously reported, Kerry's economic policy and personnel appear to aim at a replay of the Clinton years. Spending might even be more restrained than it will under Mr. Bush, especially if the GOP retains control of the House (though the Senate will now be very much in play).
As well, at a time of international turmoil, Mr. Kerry is more likely to tack back from Mr. Bush's commitment to make Iraq a full-fledged democracy in the coming years. (Though he's clearly not as weak as the caricature of him painted by his opposition.) Kerry has improved his odds of winning. With this, he improves the chance of a changeover at the top of America's political leadership.
This is no small matter, for the U.S. and the world. The U.S. occupies about 30 percent of the global economy. A change of executive at the White House is the equivalent of perhaps all ten of the CEOs for the largest Dow-Jones or Nasdaq companies changing at once. Maybe the top twenty.
A look at the markets in such past election years as 1992, 1980, 1968, 1960, and 1932 suggests there is often a final market slump in September and October as investors digest the information that a challenger may win, and the White House change parties. But there's generally an even stronger rally into December and January as people learn about the challenger and their comfort level grows. This seems to hold with both Republicans and Democrats, though the worry-relaxation ride is often a little sharper with the latter.
So far so bad
If all this is so, however, there's a question one must ask. Why was the stock market's knee-jerk reaction the morning of October 1 strongly positive?
Here are several possible reasons.
1. October 1 was the first day of a new quarter. Investors spent the morning reshuffling and reallocating -- notably, for example, in the semiconductor sector.
2. Oil hasn't surged through $50, and equities have already discounted a price in the $45-$60 range. As strong as the U.S. morning rally was, it was dwarfed by bigger gains in stock markets in Japan, China, Indonesia, and the rest of Asia -- not to mention Germany.
The beginning of a U.S.-assisted offensive in Iraq's Sunni Triangle, hours after the debate, didn't hurt either. Neither Bush nor Kerry said so -- one missed opportunity for each in the debate -- but each of their plans for Iraq implies the need for cleaning out the terrorists from the current no-go zones. Both men say they regard timely and credible elections in Iraq, scheduled for January, as critical.
Bush's willingness to start the job now shows he's serious about completing the mission. The absence of any Kerry criticism of the operation -- at least through early Friday afternoon -- shows he acquiesces with the approach. The result should help cool off the oil markets. U.S. resolve and Iraqi competence offers the hope of continued Iraqi production. It also reflects a potential for broader consensus on the need for U.S. strength under either a future Kerrybush Administration.
3. Even investors sometimes engage in wishful thinking. Futures contracts on the Kerry-Bush horserace jumped a point the morning after the debate, but by afternoon were barely changed. This suggests people putting their money where their mouth is don't think Kerry significantly changed the dynamics of the race Thursday night. In my book, they're wrong.
Did Kerry win the election with his one-night debate victory? Of course not. But the immediate impact, especially after a weekend of amplification over the weekend shout shows, should be a nice bounce in the polls. Kerry's favorability ratings didn't improve Thursday night; they exploded like a rocket, surging from below 40 percent to above 60 percent.
It's a race.
Seen in that light, there's an interesting potential Kerry-rally possibility, if one looks out over weeks and months rather than days.
The Peoplesoft factor
Interestingly, Kerry's debate win came just hours before Peoplesoft announced it was replacing its chief executive officer -- a CEO widely respected on Wall Street -- at a time of flux at the company.
The market's response? Peoplesoft surged better than 5 percent on morning trading. Investors widely assume there will be a change in Peoplesoft's approach towards a takeover bid launched by software rival Oracle, which in the company's mind is the equivalent of the war on terrorism. Evidently, in their minds, this change is good.
It didn't hurt, of course, that Peoplesoft enjoyed exploding earnings in the quarter just announced. Such performance, however, might just as well throw into question the company's strategy of changing horses, if you will, in the middle of a turbulent sea.
As the history of election-year markets above suggests, there is a potential that after one last hit to the market, rising Kerry poll numbers will not be a damper. Indeed, to the extent he's improving his position by showing himself a strong potential commander-in-chief abroad, and a moderate who will not make radical changes at home, Kerry may offer hope.
A good, competitive race, in the final analysis, is good for the country. No tennis player is at the top of his game against a weak competitor. He needs a skilled opponent to bring out his own potential. Mr. Bush, like Tiger Woods in 2002, didn't appear to have that kind of rival in August. Now he has his own Vijay Singh, in spades.
On September 30, as Tim Russert put it, "we heard the kind of debate the country has been yearning for." President Bush, who attacked Kerry with skill throughout the summer, can now be expected to retool his message and engage in the debate.
The result will be a stronger mandate no matter who wins, and an electorate that can make a more informed choice between competing visions of the future. If we assume that American voters are good at making such choices -- as "Bottom Line" does -- the implications are bullish for investors over the long run.
The bottom line
Over the coming 6 months, Kerry's return from the political dead should be a positive for U.S. and world stocks. But it appears investors have not yet fully assimilated the coming days of improved Kerry poll numbers, "how Bush lost" covers on the news magazines, and what is now likely to be a close race for at least weeks to come.
The October 8 monthly employment number, the last before U.S. voting, is not likely to be strong. And the sheer worry about what it means for the economy, and Mr. Bush, will be a drag on the markets.
For now, we're out of U.S. equities. There are better places in the world to have your money now, countries that have just been through a successful political competition -- India, China, Indonesia, Israel, Turkey, and other emerging markets in particular.
Meanwhile the U.S. homeland is about to be engulfed in useful, but bloody, political combat. Sell high, buy low.
Gregory Fossedal manages international investment research for Emerging Markets Group. His clients may (and usually do) hold long and short positions in many of the investment securities and opportunities mentioned in his reports. "The bottom line" is compiled from sources we believe to be reliable, but no representation is made that they are necessarily accurate or complete. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of UPI or EMG. Furthermore, they are subject to change without notice.
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