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Cornering The Campaign Market
Mr. Rove, watch the stocks.


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Larry Kudlow

World stock markets applauded the sooner-than-expected U.S. handover to Iraq. Energy prices fell significantly. Former Coalition Administrator Paul Bremer immediately took the next plane out of town. Things are looking up. Wasn’t it Sinatra who sang “love is lovelier the second time around”?

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Quoting from the Bayonne, New Jersey crooner is not as far fetched as one might think. Here is market strategist Barry Ritholtz on the surprise handover decision:

“The Neo-Conservative hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem. With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change.”

Speaking to National Public Radio, U.S. Deputy Secretary of State Richard Armitage talked about the benefit of “somehow confusing the [terrorists'] plans, or what we believe are plans, to disrupt the proceedings.” Ah, we are learning. The second time around.

In the same vein, a New York Times front-page headline (believe it or not) declared “Army Used Speed and Might, Plus Cash, Against Shiite Rebel”. The story went on to say “…the campaign was a mix of military tactics, political maneuverings, media management, and a generous dollop of cash for quickly rebuilding war-ravaged cities–a formula that…could become a model for future fighting against the persistent insurrections plaguing Iraq.”

In other words, American forces are starting to figure out how to win the postwar battle. And they’re going to get some help from the new Iraqi government. A new poll of Iraqis shows that 68 percent have confidence in the interim government, 73 percent approve of the Prime Minister Ayad Allawi, and 84 percent approve of President Ghazi Yawar. Nearly 80 percent of Iraqis expect that the new government will “make things better” for Iraq after the handover.

Of course all this is a positive turn of events for President George W. Bush, who is in the fight of his life in the reelection campaign against Sen. John F. Kerry. The economy is throwing off plenty of good news for Bush, with private-sector gross domestic product (minus all that defense spending) growing 5.5 percent over the past four quarters, wage and salary income rising 5.1 percent, and 1.4 million newly created jobs since last summer.

Trouble is, bad news from Iraq has drowned out good news from the economy. As a result, last year’s spectacular stock-market rally generated by Bush’s base constituency–an investor class of 95 million shareholders who are eternally grateful for tax cuts on dividends, capital gains, and personal income, and who cast two out of every three votes in the last two election cycles–have lost some of the reelection faith as the stock market stalled during the first-half of this year.

There has been some good news for the commander-in-chief on the political front. A recent Zogby poll shows Bush improving in the key battleground states. Conducted June 14-19, the survey shows Bush winning 285 Electoral College votes, compared to 253 for Kerry.

Sen. John McCain deprived Kerry of his dream-ticket veep choice when the Arizonian strongly endorsed Bush for reelection.

Even Russian President Vladimir Putin contributed positively to the Bush reelect campaign by telling the world that Russian intelligence had evidence that Saddam Hussein intended to attack the United States. This is a bullet point that will undoubtedly resurface during the Bush/Kerry debates this fall.

Bush did wrangle a 15 to 0 victory in a watered-down U.N. Security Council endorsement of the Iraqi handover. Even punier, but still something, a shadow-of-its-former-self NATO will provide token support in the form of training for Iraqi security personnel.

Kerry has already retreated from his “jobless recovery” attack, and is now reduced to nitpicking the Bush boom with blandishments about helping the middle class. But tax hikes don’t help anyone. And the Bushies are right in new ads that argue “pessimism never created a new job.”

As for Kerry’s other great campaign issue, “internationalizing the war,” the U.N. and NATO decisions, along with the Iraqi handover, are events that substantially undercut this charge. Not even Divine Providence can budge the French and Germans who grew fat on Saddam’s Oil-for-Food U.N. bounty and grew thin on shrinking defense resources caused by recessionary economies.

It takes a lot to unhorse an incumbent. In normal times a booming economy such as this one would be more than sufficient to create a landslide for Bush.

Global terrorism and Iraq have made these times anything but normal. But any good news at all from the war fronts will surely generate another big stock-market rally. Watch stocks for the best leading election indicator.



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