The financial press has decided that everything BUT the fate of tax cuts on Capitol Hill is responsible for the sagging stock market. We think the opposite, that the market is reading the maneuverings over the budget in these last days before Congress takes time out for the elections and becoming increasingly worried that there will be no tax cuts. The volatility is related to the absence of any central intelligence on what is happening. Because Congress is grappling with its main business, passing appropriation bills, there are now many points of intelligence, or rumors, as votes are stacked up on the remaining schedule. The tax legislation is like a passenger at a railroad station, waiting for a train to slow down enough to jump on. We’re told by the Senate leadership that it still expects something to come along, and if it does, it will happen quickly, with enough bipartisan support to zip through to the President’s desk. If so, it would produce the kind of rally in the Dow Jones Industrials and the NASDAQ that we saw last Friday -- a day that was supposed to see a further collapse of equities because of the crisis in the Middle East.
To his credit, President Clinton has cobbled together what could be the kind of cease-fire that existed prior to the provocation by Ariel Sharon, now Likud Party chairman, which set in motion the escalation of violence. It was important that Israeli Prime Minister Ehud Barak and Yasir Arafat did agree to a board of inquiry with a UN role, which they could not do at Camp David when Israel rejected UN auspices. The financial markets did not really correlate these events -- an indication the markets saw less of a crisis than market commentators did. Gas and fuel oil prices may go up anyway, if a cold winter hits the U.S. and Europe, but there seems to be considerable inventory of crude oil being hoarded, ready to come onto the market at the right price. A disruption could come from Iraq, with Baghdad now moving troops here and there to confront possible domestic irritations from Shi’ites and Kurds who look for attention during the U.S. political season. Yet Tel Aviv tells Washington not to worry about Iraq, that it is not acting in a provocative way toward Israel -- so that threat to the oil market seems minimal.
Was the market plunge at the opening today connected to the presidential debates last night? That would cut against the prevailing idea that Bush would be better for Wall Street. Yet it was almost universally agreed that Bush won the debate -- or at least that he did not lose it. Bush did fine, I thought, superior in substance and demeanor, but he still remains in a demand model in his tax explications. His economic advisors have him saying the really rich get a lower percentage tax than the lower income-classes, and that is "fair." He should be saying the lower tax rates are needed to increase the efficiency of the economy and foster a higher level of capital formation. The non-rich can never get rich without access to capital, and the Gore plan punishes risk-taking. He’s like a Mommy who does not want her husband to take chances with the family budget trying to get an even better income, instead insisting the surplus be used to pay off the mortgage.
I’d expect this high market volatility to continue for the next few days and end on the upside, with the limited but important tax cuts safely home. The volatility should then subside going into November 7, the elections being easier to read than this closing legislative crunch.