Election Update Jude Wanniski October 18, 1982

The volatility in the political marketplace reflects the volatility in the financial markets.  The FYI I sent yesterday is obsolete, based on polling data that is cutting against the GOP in the last few days.  The impact of the October 25 stock market plunge, played universally as the worst decline since 1929, has had a numbing effect on GOP prospects, especially when set against the Reagan theme:  Stay the Course.  Republicans had taken a shock with announcement of the double-digit unemployment figures, but the steady background of upbeat stock market news through 10/22 worked as a tonic for the GOP.  The national media played the 10/25 decline to the hilt and the visions of Hoover and Great Depression sent the GOP into a decline, as polling data made available to me this a.m. indicates.  Lehrman has dipped behind Cuomo, Chaffee in R. I. has fallen behind his Democratic challenger,  Fenwick in N. J. has lost six points in a few days of tracking polls.  A general sag has developed that could bring bigger GOP losses than were indicated to me yesterday.

Of course, this could be offset by a market surge between now and Tuesday, but we must assume that the Fed will not provide the means.  If Volcker did not cut the discount rate last week because it would have opened him to Democratic charges of politicization (they are already accusing him of fueling the bull market to help RR), he certainly will not move the rate down between now and November 2  Thus, Reagan will get no help from the Fed, and the only possibility open to a major surge, that would wipe out last Monday's memory, is a Reagan statement, at least by the weekend, that would signal the financial markets that the White House is prepared to accept a fundamental change in monetary policy.  So far, Reagan has been acting as if the market surge has occurred because of adherence to his past policies, rather than the October 5 change at the Fed, the abandonment of the M1 targets.  If RR would support the change of Fed policy and the idea that monetary policy should henceforth be directed at stable prices along a path of economic growth, he might be able to excite the markets sufficiently to improve GOP fortunes.  There are efforts being made in that direction, but powerful forces of course pushing in the other direction.

We did say the electorate was on a knife-edge, and accept the idea that however the election turns out will be the best outcome, given the stance of the President at the time.  The GOP has hurt itself by not staying in front of change, as it had presented itself in 1980.  If there are GOP losses next Tuesday of greater magnitudes than expected, at least the White House will not be insufferably complacent.  And I'd expect, with elections behind him, Volcker will continue to move the Fed along a path of fundamental change, which could mean a burst of enthusiasm next week on Wall Street no matter what.  Certainly one constraint on leading interest rates lower is removed when elections are over and done with, so we could see that happening as early as November 3. We'd get a much better move I'd expect if there is a last-minute Reagan message that really means something the markets can get their jaws around.