Wall Street fears populist presidential race

By Kristina Cooke

NEW YORK (Reuters) - The early days of the 2008 U.S. presidential race have yet to reveal a Wall Street darling, but heated rhetoric on trade and immigration has market mavens edgy that a populist may gain the White House.

Both parties sport contenders who champion policies that could restrict imported goods or the flow of new workers to the United States.

That has market gurus like Tobias Levkovich, Citigroup's chief equity strategist, worried because limits on either could spur inflation by driving American wages sharply higher, threatening a potential body blow to U.S. financial markets.

"Both sides of the political spectrum are going at it the wrong way," Levkovich said at the Reuters Investment Outlook Summit this week.

"You don't want to scare off people, it's not healthy. Financial markets are driven by fear and greed, but this kind of fear is not something I would welcome at all," he said.

Neither party stands out as demonstrably more market friendly on trade and immigration, Levkovich said. His greatest fear is a return to the sluggish growth and rising inflation of the 1970s and early 1980s known as stagflation.

Among the current slate, Democrat John Edwards and Republican Tom Tancredo stand out as the most strident populists, in Levkovich's view.

Edwards has made eliminating poverty one of the cornerstones of his campaign and has targeted President George W. Bush's tax policies, saying they unfairly burden the middle class. Tancredo's campaign issues include toughening immigration laws.

TONS MORE MONEY

Tax policy is also being watched, nervously. Wall Street insiders are nearly unanimous in the view that the Bush administration's reductions in the capital gains and dividend tax rates were huge positives for investors.

"It's been amazing watching people I know who in the '90s were doing pretty well and suddenly between capital gains and dividend tax cuts are taking home a ton more money," said Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, who agreed the economy was likely to be the key issue for the presidential race.

Any suggestion that the tax reductions on dividends and capital gains could be scuppered raises hackles.

"That would be seen as a negative, at least in the short term," said Tom McManus, chief investment strategist at Banc of America Securities LLC.

Dennis Gartman, an independent investor, said he thought a Democrat in the White House would be "an unmitigated disaster."

"Basically I'm concerned the Democrats will tax me," he said.  Continued...