How the Foley Scandal Could Maul the Market

Although we really doubt the Foley Fallout will be a huge factor come November, forgetting that, this news piece purports to be a warning about upcoming stock market performance, it makes us realize for the first time that a Dem victory will affect like more than just DC politics. Though with the Bush veto a wild card, we’ll believe that when we see it.

Add a sex scandal to the impending battle between the donkeys and elephants. Importantly for the nation's 78 million stock players, it could change the political dynamics, significantly affect the upcoming elections (now 29 days away) and have major market implications.

In fact, the scandal, known as the "Foley fallout," is already influencing stock activity. For example, money manager Raymond Stahler of London-based Stahler, Dearborn, Ltd., and a bull on energy stocks, did an about-face over the past week by lightening up on his holdings of Chevron, Marathon Oil, and ExxonMobil. He also unloaded some shares of pharmaceutical biggies Wyeth and Pfizer, even though he says both are undervalued.

His reasoning, he told me, was chiefly political. He expects that the Democrats will take control of the House in the midterm elections and have an outside shot of grabbing the Senate, as well. As a result, he thinks both energy and oil shares could come under heavy pressure.

Actually, Mr. Stahler began selling these stocks a few months ago because of his political concerns. In the past week, though, he stepped up his sales in some of the same companies. "Because of the Foley affair, the chances of my being right about the Democrats have greatly increased," he says.

The Foley affair centers on Rep. Mark Foley, the Republican who was caught up in a sex scandal involving congressional pages. Adding to the pressure on Republicans are calls for the resignation of the speaker of the House, Dennis Hastert, amid allegations that he was aware of Mr. Foley's sexual interest in the pages. (Mr. Hastert has denied the allegations and said he wouldn't resign.) Adding further to Republican woes are the troubles of Senator Allen of Virginia.

"Some friends in New York tell me I'm making a mountain out of a molehill, but I don't think so," Mr. Stahler says. "I think the market could suffer a lot more than people might imagine if the Democrats achieve meaningful gains in the election — which I'm sure they will. And if they win both the House and Senate, which I now believe is a distinct possibility, I think that could stall or beat up the market the last two months of the year."

Among legitimate matters of market concern he points to if the Democrats do make substantial headway in Congress:

• The Bush tax cuts may not survive going forward.
• The prospects of a windfall tax for the energy industry.
• Pricing pressures on drug companies.
• Significant cutbacks in defense expenditures.
• An accelerated pullback from Iraq.
• The possibility of a big shift to the left.

Mr. Stahler says he's not oblivious to the possible uses of presidential vetoes, but notes that any sizable Democratic gains would invariably create a lot of noise and worry, which, he observes, could produce a period of declining stock prices and pressure on a number of key industries. The key political question, of course, as far as the market goes: What are the chances of the Democrats snaring both the House and Senate?

How the Foley Scandal Could Hurt the Stock Market [NewYorkSun]