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Stocks and the Coming Electoral Chaos

Foreword: This missive is something of an adjunct to the ones I wrote on 10/6 and yesterday, both posted on the Gillespie Research website. Between now and election day, I plan on publishing additional material dealing with the same topic.


The chaotic events surrounding the year-2000 Presidential election certainly contributed to a shaky stock market behaving in an even shakier way. Are stocks on a course for a similar outcome this time around?

POLITICAL DISCLOSURE STATEMENT: I'm a registered Republican (by default) but consider myself a conservative with a few libertarian leanings.

Unexpected events are the ones that have a propensity to really jolt the financial markets. The reason? Well, because they are "unexpected," of course!

When you think about it, there really are very few things that genuinely sneak up on markets. Almost all coming events cast a shadow in advance of their arrival. However, the shadows are often very faint, and they surely do not broadcast their timing at all well.

For instance, with the beneift of hindsight aided by an expanding body of historical information, Pearl Harbor wasn't a major surprise. That it occurred on 12/7/41 was. When you examine the long list of events leading up to what occurred in the United States on 9/11/01, they or something like them were not surprises, either. However, the specific timing and the nature of the events certainly were.

From last week's missive (10/6, "The Mother of All 2004 Failing Stock-Market Rallies?"):

"There's the continuing threat of domestic terrorism, of course, ... Considering where the major sentiment measures are at present, the stock market is ill-prepared for such an event. It would get creamed!

"But is it possible the ingredients for another kind of terrorism of sorts are beginning to coalesce. Suppose, for instance, the Presidential election segued into out-and-out chaos? I sense this as a growing possibility.

"Something is up with the huge quantity of new voter registration throughout the country. Where I suspect this is leading is massive voter fraud on 11/2, or at least what will appear as such -- something akin to what Florida-2000 spawned, but on a much, much grander scale! Taken to an extreme -- something not to be ruled out, in my view -- it could leave the United States in political chaos on the morning of 11/3."

I went on to conclude that such an outcome would not be at all charitable to the US financial markets. I certainly have not changed my view on this since last week.

The ingredients are now very much in place for a high level of either actual or perceived election fraud. And to stay out of the partisan fray as much as possible, although I did begin this missive with my standard political disclosure statement, fraud of the perceived variety can and is likely to work in both directions. To wit: Republicans alleging it against Democrats as well as the other way around.

I can envision, and quite realistically, wholesale allegations coming from both sides leading to numerous petitions to federal judges in more than one state for extensions of voting hours, thousands of impounded voting machines, cries heard 'round the globe of "disenfranchised voters" in huge numbers, ad infinitum, ad nauseam. Even now, the reverends Jackson and Sharpton are making such charges as if they were a fait accompli, despite the election still being almost three weeks off.

And while I am not purposely picking on the Democratic side of the aisle, DNC Chairman Terry McAuliffe incessantly brags about how he has at his disposal an army of attorneys who will fan out far and wide to keep the process honest. (Perhaps this is tantamount to stating, "we are going to challenge anything and everything there is to challenge" -- and then some?) And the RNC claims to have legal SWAT teams in place as well. So at minimum, there will be thousands of lawyers who are very busy people on 11/2. And well after 11/2, I suspect and fear!

During the first quarter of 2000, far in advance of the Presidential election on 11/7, the stock market already had made peaks not matched or eclipsed since. In other words, the secular bear market that is still in progress today was well underway by election day 2000. Therefore, with stocks already in a general downtrend, you cannot say for sure how much damage the unexpected political chaos inflicted. But you can get a pretty good handle on the fact it was relatively substantial. Let's start with the following table.

Low Close
11/07 and
% Change
11/07 to
12/12 Low
DJIA 10952 10768 10374 12/01 -1.7 -5.3
S&P 500 1432 1371 1315 11/30 -4.3 -8.2
NAS 100 3280 2863 2507 11/30 -12.7 -23.6
*Dates: 11/7 = year-2000 election day. Hours after the stock-market close on 12/12, the US Supreme Court brought in its ruling favorable to Bush in Bush V. Gore. On 12/13, Gore conceded the election.

As the numbers show, the post-election sell-off through the immediately subsequent closing lows in the three proxies I've used were significant. But there is an additional piece of statistical information needed to put the declines in a better perspective. The DJIA, S&P 500 and NASDAQ 100 declines for all of 2000 were 6.2%, 10.1% and 36.8%, respectively. Thus, the declines in the period immediately following the election were equal to a very large amount of 2000's total red ink.

With all the ingredients for significant electoral chaos falling neatly into place well before the fact, it is difficult to envision the markets will wait to be completely blind sided by the event. Of course, maybe there will be no event of this nature.

I personally think the chances run high there will be, which is why I authored last week's piece, this one, and plan to do more work as the election approaches. Moreover, perhaps the very recent weakness in stock prices is the beginning of the recognition the potential hazzard indeed exists.

As I wrote last week, in the piece dated 10/6, stocks were then at or nearing levels from which the next installment of this year's series of failing rallies could legitimately be expected to begin. From the close on 10/5 through yesterday, the average decline in my seven-measure tracking group was 1.3%. That certainly is no big deal (yet), but the pullback did commence more or less right on schedule.

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