Possible Election Chaos Weighing on Stocks

Add election chaos to the list of worries plaguing Wall Street. With just over a week to go before America heads to the polls, all the major stock indexes are in negative range for the year, and pricey oil may not be entirely to blame.

A repeat of the 2000 recount would almost certainly send stocks tumbling, and some analysts say that possibility is already being factored into share prices. The thought that terrorists might try to disrupt the electoral process has also crossed traders' minds. And, as is the case in any tight race, some professional investors are making sector bets in an attempt to game the outcome. If Sen. John Kerry manages to unseat President Bush, the thinking goes, businesses in heavily regulated industries are likely to face a tougher climate.

But with lawyers from both parties descending on swing states in anticipation of a contested result on Tuesday, Nov. 2, some market watchers think litigation is inevitable. In an already difficult market pressured by decelerating earnings, rising interest rates, lofty energy prices and terror fears, the prospect of a protracted struggle for the White House has given investors plenty of reason to avoid risk.

"It may be that one of the reasons the market hasn't done well lately is it is discounting the possibility of real uncertainty following the vote," said Greg Valliere, chief strategist at Schwab's (SCH) Washington Research Group. "From what I see, there's a two in three chance we'll know by Wednesday morning who won. But you know, if someone told me there's a one in three chance the flight I'm taking tomorrow is going down, I'm taking the train."

Valliere said one of the most likely controversies could come out of Colorado, where voters are considering a measure to change the way the state parcels out its nine electoral votes, scrapping the current winner-takes-all system in favor of splitting them up proportionally, based on the popular vote. If one candidate gets four votes and the other gets five, it could be pivotal in a tight election. Opponents have already filed a lawsuit against the proposal, which would take effect with this presidential vote.

Legal challenges are also pending over various issues in Florida, and there's potential for recounts in a handful of other states where polls show close races, including New Mexico, New Hampshire and Wisconsin.

"I don't think it would surprise anyone to wake up on the third (of November) and not know who's president," said Howard Silverblatt, market equity analyst with Standard & Poor's. "We're going to see litigation, no doubt about it, but you don't know what the situation is going to be. There's going to be a lot more monitoring by both parties, there's already more legal action, so it's going to be a difficult situation."

During the six weeks it took to determine the outcome of the 2000 election, the markets gyrated wildly. The Standard & Poor's 500 (search) shed 9.59 percent from Election Day to the end of November, its lowest point during the period. By the time the Supreme Court issued its decision on Dec. 12, the S&P had recovered somewhat, but was still down 4.24 percent. Settling the matter didn't help the market go higher, though. The S&P continued its slide all the way through 2001, extending a bear market that began in March of 2000 after the tech bubble peaked.

Should the race be contested this time around, there is some concern among market watchers about the reaction of foreign investors, who might see a second election fiasco as a signal that all is not well in U.S. presidential politics. If a prolonged controversy pushes large numbers of global investors to the sidelines, it could be bad news for the dollar. The cost of imported goods could rise, further pressuring already strained consumers.

But if there is a dispute, few analysts think it would take as long to resolve. What happened in 2000 was unprecedented, they reason; it wasn't immediately clear how to deal with it. This time, both parties are prepared to argue their issues in court.

"It's pretty clear you have to have your army of people and lawyers ready to go in and do the job," said Tracy Herrick, chief investment strategist at Jefferies & Co. "I don't think it's going to be that kind of cliff hanger. I think if it is unclear, there will be very quick action."

Ultimately, however, Herrick and other analysts say what's more likely to affect the direction of the stock market in the months ahead is the Federal Reserve's (search) interest rate policy, rather than which party controls the White House.

"Presidential policy as it relates to the economy is felt further down the road," observed David D. Legeay, director of portfolio management at the McDonald Financial Group. "To me, who's the chairman of the Fed, who's the secretary of the Treasury, those are more immediate issues."