In his victory speech last night, Al Gore spent a lot of time on the current economic prosperity, saying, “We don’t need to go back to where we were eight years ago.” Then, of course, he repeated the “risky tax scheme” attack on Governor Bush’s broad-based tax cutting program. But Gore may have a problem selling prosperity if the stock market continues to deteriorate. As a long-time optimist, I continue to believe that the Internet economy guarantees a continued prosperity boom and further advances the bull market for many years to come. That said, however, nasty stock market corrections come and go, and we could be in one now. Caught between rising interest rates induced by the Fed, and rising oil prices from OPEC, stock market worries over future earnings are mounting on a daily basis.
The Clinton-Gore administration is close to powerless when it comes to Alan Greenspan. But they are far from powerless regarding OPEC. It’s not too much of a reach to argue that Saudi Arabia and Kuwait — two large oil producing states — are wholly owned subsidiaries of the U.S. national security apparatus. So far this year, oil prices have risen another 18%. That comes on top of last year’s increase of more than 150%. The threat of $2 a gallon at the gas pump is becoming more real according to a recent Energy Department study, and world oil supplies are relatively tight in the wake of OPEC’s decision to take 4 million barrels out of production.
The Clinton administration has been sleeping at the switch on this one. A few months ago Steve Forbes raised the issue, and more recently George W. asserted that if he were president, he would “jawbone” OPEC into higher production and lower prices. Energy Secretary Bill Richardson, who is mentioned occasionally as a possible Gore Vice President, has been globetrotting to convince OPEC to loosen up. Still, at this date — with oil surging to $34 a barrel yesterday, its highest level since the Gulf War — no decisive announcements have yet come from the OPEC cartel.
Even in the event of an OPEC decision next month to raise production, some analysts on Wall Street believe it could take many months to bring the additional flow on-stream. So, the worst-case view is that oil could conceivably reach $40 before it starts dropping to a more normal level in the low $20s. That means stock market anxieties could grow worse, and the Federal Reserve may be forced to raise rates even more in order to stop oil prices from spreading through the rest of the economy.
So far, the Dow Jones index has lost 15% YTD. And the NASDAQ is looking a bit wobbly. Eighty percent of the S&P 500 stocks are down 20% or more. And even within the impervious NASDAQ, 62% of its stocks have declined 20% or more. All of this will make the 80-million-strong investor class very unhappy as we move toward the November election.
There is a precedent for this potential investor-class revolt. In 1994 the conventional pundit wisdom was that the Democrats would maintain their hold on Congress because the economy was growing at 4%. However, interest rates blew sky high in that year, and 70% of the S&P 500 stocks were down by 20% or more. So, apart from the Newt Gingrich message of tax cuts and limited-government reform, looking back it would appear that the investor class voted for a check on Clinton’s bear-market policies (higher taxes and health care nationalization) in order to prevent further retirement portfolio losses.
In today’s setting, the investor class is surely unhappy with Bill Clinton’s Great Society budget that purports to spend an additional $125 billion a year on numerous new and existing government programs. And the investor class may be growing weary with the Clinton-Gore debt reduction mantra that looks suspiciously like a ploy to spend mounting budget surpluses.
So, even if this year’s economy grows in the 3-4% range, a slumping stock market (that could foreshadow a high-tax future slow down) may be an early warning indicator that the investor class believes it’s time for a change in the White House.