Look Both Ways: Indecision 2004?

The possibility of another ''hung election'' is worrying the riskier end of the capital markets. According to figures from 2000's period of electoral uncertainty, it's not so much who wins the presidency as when.


The week that was saw the usual round of mixed to lukewarm signals about the direction and speed of the economy. Tuesday’s Conference Board report showed the consumer confidence index dropping more sharply than expected in October, to 92.5 from the previous month’s 96.8. That report was pretty neatly counterbalanced by the University of Michigan’s Friday update, in which its measure of consumer sentiment rose more than expected, to 91.7 in October from September’s 87.5.

Equally ambiguous was the Commerce Department’s report showing a 3.7 percent rise in third-quarter gross domestic product, up from the second quarter’s 3.3 percent but still lower than most forecasters had envisioned.

But one looming development is likely to overshadow all other news in
shaping financial markets this week. That, of course, is the presidential election — even though the Street doesn’t appear particularly worried about who will win.

The chief worry, at least for the riskier rungs of the investment
ladder, is whether the country will face another “hung election” as it did in 2000, when it took nearly a month to find out who won, according to Merrill Lynch high-yield analyst Chris Garman.

Speaking with CFO.com, Garman cited Merrill Lynch figures showing that investments in double-B-rated debt, the highest creditworthiness in the junk-bond universe, lost 0.16 percent from election day — November 7, 2000 — to the week ending December 1. That week, Katherine Harris certified Florida’s electoral votes to George Bush; not quite two weeks later, the Supreme Court heard Bush v. Gore and largely ended the uncertainty over how the election would be decided.

Descending further into junk land, Garman’s figures show single-B paper investments losing 2.38 percent and triple-C, 4.33 percent. A check of major investment indexes shows the Dow Jones Industrial Average losing 5.3 percent over the period, going from 10,952 to 10,373, and the generally riskier NASDAQ composite down 22.5 percent, dropping from 3,415 to 2,645.

Despite the more widespread expectation of an uncertain result tomorrow, Garman believes that the downturn for riskier investment this time around is likely to be both more severe and prolonged. “Last time [the disputed election] really did take the legal arms of both parties by surprise; this time they’re really prepared and lawyers are ready to take action” to contest the results. That sets up things for an even more prolonged period of uncertainty in both politics and junk bonds, he reasoned.

Sectors hit hardest in 2000 were steel, technology, and telecommunications, according to Garman. Likely to be hardest hurt this
time around, should Garman’s scenario come to pass, include cable,
airlines, and autos — all of which are already experiencing some degree of
riskiness or volatility.

Looking past election day, Wednesday’s Commerce Department report on October auto and truck sales is expected to show no change from the prior month’s 5.3 million, according to a consensus estimate compiled by Briefing.com.

Friday’s monthly employment numbers from the Department of Labor will be, perhaps, the most closely watched set of reports this week. With markets waiting to see whether nonfarm payrolls will grow much more than the disappointing 96,000 new jobs registered for September, the consensus calls for a rise of 160,000.

But many remain skeptical. As we reported in this space last week, New York Fed economist Simon Potter predicted that job growth through next March will average 83,000 to 100,000 per month — a much slower pace than consensus forecasts. Garman, for his part, points out that junk is vulnerable to a setback when the report comes out, given that “current spread levels in the bond market are optimally priced for a gain in job levels of about 200,000 per month.”

Ed Zwirn’s column on economic indicators appears on Mondays. Contact him at EZwirn@aol.com.

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