The Payoff In November

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From drugs to financials, the stock market is trying to anticipate who will win the White House this fall. Sorting it all out is a TIME panel moderated by senior writer DANIEL KADLEC and including Richard Bernstein, chief U.S. strategist at Merrill Lynch, Gregory Valliere, chief political strategist at Schwab Soundview Capital Markets, and Thomas Gallagher, chief political analyst at ISI Group.

TIME: Do Presidents and politics move markets in ways we can anticipate?

THOMAS GALLAGHER: Sure. But unlike with economic or industry news, markets tend to react to politics — not discount them ahead of time. That creates opportunities if you can anticipate political trends. In the '92 election, we had a Clinton stock index, and for a 10-week period starting in mid-September, it outperformed the S&P 500 by 10 percentage points. But most of the move came after the election. Very little had been anticipated.

GREGORY VALLIERE: In normal times investors look at things like profits and interest rates. But these are different times. There are two new factors playing a huge role. One is the terrorism premium. Is it 25% of the price of oil? Nobody can quantify, but it's there. The second one is the election. There, I would not look at it in sweeping terms. The main issue is stock sectors, and there could be some pure plays in things like health care and other sectors depending on who wins.

TIME: We'll get to that. First, a word on the Fed chief, Alan Greenspan, whose term expires under our next President.

VALLIERE: Greenspan day in and day out is more important to the economy than the President. But whether it's Kerry or Bush, whoever chooses Greenspan's replacement in '06 will choose a centrist.

TIME: Like Bob Rubin?

GALLAGHER: If Kerry wins, no reason to think otherwise. At the convention Rubin was sitting next to Teresa Heinz [Kerry].

TIME: Like Greenspan sat next to Hillary Clinton 11 years ago.

VALLIERE: Yes, at the State of the Union address. If Bush is re-elected, I'm sure [Harvard professor] Marty Feldstein is on the short list. Feldstein is a fairly moderate Republican.

GALLAGHER: The transition process will be turbulent. Feldstein had a whole different approach to deflation risk. He thought there should have been a much more aggressive fiscal approach, which would have had the Fed chairman aggressively endorsing tax cuts. He's also a big advocate of Social Security reform.

TIME: Does choosing the next Fed chief shape up as the biggest decision the next President will make for investors?

RICHARD BERNSTEIN: Whoever is President, they'll end up raising taxes because the deficit is a problem. That may be a bigger issue than the Fed chairman in '05.

VALLIERE: I'm a deficit dove. The deficit is coming down, and the correlation between big deficits and high interest rates is shaky at best anyway. So I don't think there would be a tax increase with Bush.

BERNSTEIN: Well, I'm a deficit hawk. I believe we're in a generally deflationary environment and that government should have as clean a balance sheet as possible. As we go through '05, we are going to need to correct those deficits.

TIME: What kind of tax increase might we see under Bush, Rich?

BERNSTEIN: He's not saying anything, so who knows? If he does nothing, it will effectively be a tax increase because certain tax cuts will expire. So he doesn't have to be aggressive; all he has to do is sit back.

VALLIERE: The big one is December 31, 2008. That's when the dividend and capital-gains rates of 15% go back up. The estate-tax cut expires in 2010.