Business: The Election Market

The sliding stock market last week broke through its 1960 low in heavy trading and plunged on down to 566.05 on the Dow-Jones industrial average, the lowest point in nearly nine years. Then, just as Wall Street braced for the worst, the market ran up two days of substantial gains before it eased and ended the week about where it had started.

There was no doubt that gloomy talk about poor business gave the market a push down. Thousands of small investors across the nation were suddenly aware of a dampening word: recession. Said Jacques Coe, who keeps tab on what the small investor is doing by totaling the odd-lot purchases and sales: “Never in all my years have I seen this type of bearishness. The most recent figures show short selling running eight to ten times normal.” Since Coe believes that the public becomes most bearish when the market is about at its bottom, he expects a sustained upturn before the end of the year.

Wary of Change. One of the chief subjects of debate among Wall Streeters was the effect on the market of predictions that Democratic Candidate John F. Kennedy will be elected. Some analysts believe that the market’s recent slide was caused by the spreading belief that Kennedy will win and will bring on more inflation by stepping up Government spending. This reasoning seemed to contradict the market’s recent history, where fear of inflation has helped send stocks up since they are considered one of the best hedges against it. But brokers had an answer to this paradox; they argued that inflation sends the market up only when there is a prospect that earnings and dividends will keep pace with inflation and not be squeezed by rising costs, as they have been for many corporations.

Perhaps closer to the real explanation of the market’s queasy behavior is that it is traditionally wary of any change, is upset by the possibility of a switch in parties in the White House as the election draws closer. Wall Street’s general feeling is that, with the pre-election uncertainties out of the way, the market will rally no matter which candidate wins. The market has apparently largely discounted a possible Kennedy victory, while a Nixon victory, with the odds now against him. would be a surprise that would mean a hefty market rise. Furthermore, the Street believes that whoever wins will substantially increase federal spending, perhaps give business the push it now lacks.

Worse Performance. The current stock market is performing far worse than in other election years. Contrasted with an average gain of almost 7% in the first ten months of presidential-election years, this year’s market is down about 15%. Before the 1948 election, the market was sluggish, went into a slump after Truman’s surprise victory, picked up again in 1949. In 1952, the market shot up on Eisenhower’s victory. In 1956, the market picked up in expectation of Ike’s reelection, was hit briefly by the Suez crisis at election time, then picked up at year’s end.

As for how each party affects the postelection market, the record is thoroughly mixed. Of the 15 elections since 1900, Republican victories were followed by four market advances and four declines in the year following the election; Democratic victories were followed by three advances and four declines.