In our "Market Selloff" report last week, we tied the increased volatility to presidential politics and warned that "Going into the August conventions, it will be roller-coaster time on Wall Street, so strap on your seat belts." The gyrations since remind us of the old days on the Cyclone ride in Coney Island. The New York Times this morning picked up the roller-coaster metaphor in its front page story on yesterday's breathtaking swings. We expect this to continue, but our comment last week that "it makes sense that investors in U.S. equities would pull in their horns by several percentage points in an adjustment of risks" was not a calamitous forecast. Which is to say there is little prospect for a 1987-type selloff. That crash developed around a confluence of the higher capital gains taxes that went into effect that year and the breakdown of the Louvre Accord on monetary stability on that dark October weekend prior to Black Monday. That was a jump from a cliff, not a Cyclone ride.
It is more likely that the Dow Jones Industrial Average and the NASDAQ will reach new highs this year than fall much further. In a presidential election year, the electorate has its greatest leverage in moving our political leaders in the correct direction. The most important tool employed by the voters is fear, which operates just as well through the DJIA and the NASDAQ as it does through the voter preference polls. (In his classic comedy routine, the Thousand-Year-Old Man, Mel Brooks was asked what the principal means of transportation was a thousand years ago, to which he replied: "Fear. A tiger growled and you ran like hell.") The recent swoops on Wall Street have both the Clinton and the Dole campaigns rethinking their economic strategies, thereby increasing the likelihood of a positive outcome in this year's elections. I'm told by an important Democrat that Treasury Secretary Bob Rubin was calling around yesterday saying a cut in the capital gains tax may be proposed for next year in order to persuade investors to stop selling stocks now. Ups and downs in the market will follow, especially as the Perot factor changes the odds in all the political races, congressional as well as presidential. Policy and personnel will blow hot and cold.
The equity markets as always are discounting the long term; the long term being a series of short terms. In the short term, the markets want to know what the Fed will do on August 20 and what Alan Greenspan will say tomorrow. Greenspan certainly will react to the downdrafts he is watching on Wall Street, bolstered in his recent arguments that there is no need to raise interest rates. The long term, especially the next four years, has so many different possibilities because of the extraordinary political flux. Ross Perot, who was not supposed to be able to attract more than 8 or 9% of the vote, suddenly jumped to 16% in the latest NYT poll, having done nothing more than to declare his willingness to be nominated in the party he is creating. In a three-way match-up, Clinton is at 49% and Dole at 27%, leading to realistic speculation that if Perot were to unveil a growth agenda, he would tear past Dole into second place. In his political column Tuesday, Wesley Pruden, editor of The Washington Times, offered the fantasy of Dole so far behind by the time the GOP convention convenes in August that he announces for the sake of the party he will throw open the convention for an alternative nominee. Pruden suggests that by the end of the month, Perot could close to within 6 points of Dole in the match-up polls that everyone is watching. "By waiting until August to bequeath his great gift to the party, Bob Dole would guarantee an open convention. Nobody would have time to ruin it in the way that the primaries have ruined the process..."
This is still fantasy, but it now leads to speculation on the political grapevine that national pollsters soon may be asking Republican voters whether Dole should withdraw in favor of an open convention. Perot now takes 10 percentage points from Dole and 6 percentage points from the President. With a growth agenda, Perot could easily add 12 points, with 8 points coming from Clinton, 4 from Dole. This would put Clinton at 41, Perot at 28, Dole at 23, plus the "not sure." With a serious running mate like Jack Kemp, whom Perot had thought might be the Reform presidential nominee if Kemp got into it, you easily could imagine the numbers pushing Perot into a serious contest with Clinton, and with Dole trailing far behind. The net effect would be an enormous turnout, which would mean that even in a Clinton re-election the Congress would be tilted toward a growth-oriented GOP. These are not implausible scenarios anymore.
This morning's Wall Street Journal has a solidly reported story by Jackie Calmes: "With Dole in the Doldrums, Worried Republicans Get Rebellious and Press Hard for a Big Tax Cut." The essence is that the GOP congressional leaders are taking policy matters into their own hands. They are planning an "economic summit" next week to hammer out a party position on taxes before the convention platform committee meets and before Dole's campaign unveils its tax plan, supposedly 10 days before the convention. The last paragraph gets to the bottom of things: "Some Republicans... already see a silver lining should Mr. Dole still look like a loser by Election Day. They figure ~ privately, of course — that their GOP congressional candidates could be helped as voters instinctively choose a divided government — re-electing Mr. Clinton and a GOP Congress to keep a rein on each other." This is now becoming conventional wisdom inside the GOP Beltway.
Steve Forbes, on the other hand, is working like a trouper on Dole's behalf, acting as if Dole can recover through an infusion of Forbes's revolutionary fervor. Steve actually told USA Weekend July 12-14 that he would consider serving as Dole's running mate, but didn't expect the call because of the anti-Dole commercials he ran in the primaries. Anyway, he added: "If the top of the ticket doesn't have his act together, you can pick Jesus or Moses as VP, and it's not going to save you." A grapevine rumor I can't pin down has it that Steve has persuaded Dole to opt for a two-tier income tax system, of 28% and 14% brackets, with a 14% capital gains tax. This is essentially the shape of the income-tax that Vice President George Bush campaigned on in 1988, which somehow got lost in the hands of OMB Director Richard Darman, Treasury Secretary Nick Brady, and Senate Minority Leader Dole. The Senate Democratic leader, then George Mitchell of Maine, delivered the coup de grace.
In a three-way race, it is possible that Dole could still overcome the enormous problems in his campaign. If Perot's campaign develops in a way that drains twice as many votes from the President as from Dole, and the President gets himself into deeper trouble with the "character issue," perhaps Dole can get his act together with the help of Steve Forbes, Don Rumsfeld and Jack Kemp. As long as the possibility exists, we can't be jumping to conclusions about the early demise of Bob Dole. If Perot overtakes Dole in the match-up polls, on the other hand, we can be pretty sure about jumping to that conclusion. Please, though, don't jump up while on the roller coaster, it always comes back down to earth.