Rising markets may give Bush lift

WASHINGTON -- With share prices reaching levels not seen in more than a year, will happy investors reward President Bush with their votes?

Probably, say economists and political analysts, particularly if equity prices rebound alongside rising employment rates.

With more Americans than ever relying on the stock market for retirement income, the prospect of rising share prices is generally as much an asset for a sitting president as a weak market is a liability.

"When you have both the Dow Jones and Nasdaq averages hitting new highs at the same time, it's a fabulous day for President Bush," says Jonathan Collegio, a director at Americans for Tax Reform, a conservative think tank in Washington. "And when you consider that under this administration we've had two wars, a catastrophic terrorist attack and numerous financial scandals, it means the investor class is happy."

Not everyone agrees.

"The problem is a lot of investors have a ways to go" before their losses are recovered, said Stephen Hess, a senior fellow at the Brookings Institution in Washington. "Not everyone is a day trader and not everyone turns to the stock pages first thing every morning."

But the investor class has over the last decade evolved into a key electoral constituency. According to Americans for Tax Reform, roughly 70 percent of voters considered themselves market investors in the 2002 midterm election. More than 80 million Americans are invested in equity markets, a doubling in number from twenty years ago. During the same period, the number of voting households with stock portfolios rose from less than 20 percent of the total to roughly half.

Analysts say as pension funds recover, Bush should be able to take for granted a victory in retirement enclaves like Florida and focus instead on other Rust Belt states like Ohio, where the president is under pressure to resist international demands to remove subsidies on US steel products.

"This energizes his base," said Peter Morici, an economist and professor at the University of Maryland's Robert H. Smith School of Business. "A strong market will encourage Republicans to give money and turn out the vote."

Even among noninvestors, a buoyant stock market is an important element in the kind of economic recovery credited generally to incumbent leaders. And while economists and historians note lingering unemployment could neutralize whatever dividends Bush may earn from rising share prices -- "the most important number is not the Dow but unemployment," says presidential historian, Robert Dalleck -- employment is expected to grow as inventory rebounds. That, say economists, means Bush could expect a recovery windfall heading into the election.

Ray Fair, a Yale economist who has built several models for predicting the outcomes of presidential campaigns, says Bush will win in November assuming the economy and share prices grow at their current trajectory. "There is a link between the economy and whether people will vote for the incumbent and the stock market is one part of it," said Fair. "Probably employment will grow enough to reduce unemployment. That's one reason why the market is doing so well."

If history is any guide, however, the prospects for a sustained rally under a second Bush term are low.

According to an article published in the October issue of The Journal of Finance, share prices have for much of the last century fared better under Democratic presidents than Republicans. Using a broad index of stock prices, professors Pedro Santa-Clara and Rossen Valkanov at the University of California at Los Angeles found that the stock market between 1927 to 1998 returned about 11 percent more a year under Democrats and 2 percent more under Republicans.

Treasury bills also performed better under Democratic presidents, yielding a 5.3 percent higher return than the Republicans' 3.7 percent.

The cause of the disparity is uncertain, according to the study, which suggested share prices may have more influence over the outcome of presidential elections than a sitting president has over share prices.

"In sum," the authors write, "the market seems to react very little, if at all, to presidential election news."

Stephen J. Glain can be reached at glain@globe.com.