Why The Market Will Go Lower No Matter Who Wins

In my humble and conservative opinion, I believe that the stock market (specifically the Dow Jones Industrial Average) will go lower no matter who wins next week’s U.S. Presidential election.

Let me make one thing clear right up front: I am speaking strictly from an economic point of view. I won’t fall into the trap of being political in my commentaries. All I can tell you is how, from an economist’s point of view, each presidential candidate’s promises – if fulfilled – will be absorbed by the stock market. Also, as you read, please keep in mind the general bearish state of mind I have been in for the past five years.

Yes, in the last couple of days the market has rallied. From my standpoint, the rally is natural from the very oversold condition of the market. And, may I remind you that the Dow Jones Industrial Average hit a new 2004 low just last week.

If Kerry wins he vows to raise taxes. I understand Kerry talks about raising the taxes of high-income earners, but high-income earners are usually the owners of the small businesses creating the backbone of America’s economy. It’s easy: Raise taxes and people spend less. There’s a simple and direct relationship between the income people keep and the amount of money they spend. As consumers spend less, companies make less money and stocks go down. And with the high level of debt consumers are already burdened with, higher taxes may cause more financial strain.

If Bush is elected again, he promises to not raise taxes, which means our deficit will continue to rise rapidly… and the market doesn’t like too much debt. Yesterday’s media carried a report that Bush might ask for another $75 billion for the war. I wouldn’t be surprised if our projected annual deficit of $500 billion ends up being conservative, no matter who is in the Oval Office.

Hence, and I need to stress this from an economic point of view (so I don’t get e-mails telling I’m biased to one candidate or the other), it’s six on one hand, half a dozen on the other. And I’m not saying either party’s policy will directly lead to lower stock prices… but I am saying that there’s simply not much economic maneuverability available.