Conventional Wisdom: Stock Market Dances To Bush's Tune

Like it or not, bulls want a smooth convention that lifts chances of re-election.
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Wall Street bulls have high hopes for the Republican National Convention.

Not only do they expect the event to be free of violent demonstrations and terrorism, but they believe President Bush will receive a nice bounce in the polls after the nomination, which they say could add further fuel to the recent rally. Even if the protests do get out of control, the implications for Bush might not be bad.

Wall Street bears aren't so sure. Even if the convention passes smoothly and Bush sees his ratings improve, they say investors are likely to remain concerned about terrorism and uncertain about the outcome of the election right up until Nov. 2.

Jay Suskind, head of institutional equity trading at Ryan Beck & Co., falls somewhere in the middle.

"I think if you get through the convention without any terrorist event, the market will probably respond to that," he said. "But it remains to be seen what performance Bush gives, and the market will still be fixated on the election."

Roughly 50,000 visitors descend on New York City starting this weekend for the Republican convention -- and thousands more are expected to protest.

Some analysts worry that the demonstrations could turn violent just as they did at the Democratic National Convention back in 1968, while others fear that terrorists could use the event to launch an attack.

Although the government has received no intelligence to suggest that Al Qaeda is planning to strike this week, officials say terrorists undoubtedly would like to disrupt the election process just as it did in Madrid five months ago.

If high-profile events like the Republican convention and the Olympic Games can end peacefully, some think there will be a sense of relief on Wall Street. And -- excluding terrorism -- political violence also could conceivably help Bush. The

Dow

industrials actually rose slightly during the 1968 convention, which gave Richard Nixon an opportunity to portray himself as tough on lawbreakers.

Andrew Laperriere, managing director at the International Strategy and Investment Group, said an increase in Bush's approval rating also could boost the market, because many traders and analysts on Wall Street have benefited from Bush's tax cuts and would like to see him re-elected.

Current polls show Sen. John Kerry and President Bush in a statistical dead heat but incumbent presidents usually see a 6-point bounce in the wake of a convention, according to Laperriere.

"We've seen in the last couple of months that as Bush's fortunes rise, the market rises and as his fortunes decline, the market declines," he said. "If Bush is perceived to have had an effective convention and his numbers improve, I think that would support the market."

Still, others say it isn't clear whether the market has been tracking Bush's re-election prospects in recent months or simply new developments in the economy.

There's also no assurance that Bush will receive the traditional postconvention bounce because there is a smaller number of undecided voters this time than ever before. Pundits also note that there will be less coverage of the convention by the major news networks this year, which could impact the polls.

Even if Bush does receive a boost, however, some analysts say a cloud of uncertainty will continue to hang over the market. After all, there is little relationship between a postconvention bounce and a win in the general election.

In 1980, for example, Jimmy Carter got a 10-point bounce and went on to lose the election. Walter Mondale got nine points in 1984 and lost every state but one.

"The market will probably remain in a state of limbo about the outcome of the election," said Suskind, adding that investors also will continue to worry about a "Spain-like event."

The Madrid train bombings, which occurred three days before the country's March election, led to the ouster of the right-wing, pro-U.S. ruling party. A survey by the National Association for Business Economics recently found that terrorism is the biggest short-term problem facing the U.S. economy.

Jon Brorson, head of growth equities at Neuberger Berman, said the Republican convention probably won't be the catalyst for the market that many bulls are predicting.

"The market is still looking for more substantial economic data; the August employment report is going to be very, very big," he said. "That's going to be more critical than if Bush gets a bounce or we don't get terrorist activity."

James DePorre, a trader and contributor to

TheStreet.com's

sister site

RealMoney.com

, agrees that the convention could be anticlimactic for the optimists.

"There is some talk that an upbeat Republican convention next week in New York may help boost the market, which is generally viewed as having a strong bias for President Bush," he said. "I'm not too optimistic about anything significant at this point, mainly because of the likelihood that volume will stay tepid."

Volume is typically sluggish the week before Labor Day but is expected to be even lighter than usual this year, as many traders and analysts take the week off to avoid the throngs of protesters and police officers that are expected to flood the streets of New York. "The one certainty is that this will affect volumes," said Brorson.