“When investors start to focus intensely on politics, it can be a bad sign — sort of like a mathematician offering literary criticism,” writes E.S. Browning in today’s Wall Street Journal.

“Typically, when the economy and the investing climate are good, investors tend to shrug off politics. When the U.S. was fixated on President Clinton’s impeachment in 1998 and 1999, the markets largely ignored the news and stocks went up.”

“Today, as the Democratic convention opens in Boston, investors aren’t shrugging anything off. As they wring their hands over corporate profits, economic growth and inflation, they also are finding time to worry about Sen. John Kerry’s tax policy, President Bush’s bad relations with some traditional allies and the risk of terrorism at one of the conventions.”

” ‘I’ve been spending a lot of time with clients over the past four months, both here in the U.S. and abroad,’ says Kim Wallace, chief political analyst at New York brokerage house Lehman Brothers. Based on what they are saying, ‘I would consider that uncertainty around the outcome of the presidential election is one of the major influences on the skittishness in the U.S. market.’ “

“It could be a coincidence, but as Mr. Bush’s opinion-poll ratings have fallen during the past few months, so have the stock indexes. On June 13, none of the hedge-fund managers surveyed by research firm International Strategy & Investment thought Mr. Kerry would win; by July 21, 53% picked Mr. Kerry. (Mutual-fund managers continued to pick Mr. Bush, but they trade stocks much less rapidly than hedge-fund managers). From June 14 through July 21, the Dow Jones Industrial Average fell 3.5%.”

“Last week, the Dow industrials finished below 10000 points for the first time since May, falling to 9962.22, near their low for the year of 9906.91. For the week, they gave up 1.75%, or 177.56 points, including a decline of 88.11 points Friday. The industrials posted their fifth consecutive week of losses, the longest such losing streak since 2002.”

“The most immediate cause for the slump was a continuing fear that the best of the corporate-profit gains are ending. On Friday, part of the problem was news that Microsoft’s quarterly profit and Coca-Cola’s quarterly sales had missed investors’ expectations.”

“The most talked-about political worry is Mr. Kerry’s tax policy, which, according to his policy advisers, calls for undoing the recent cuts in capital-gains and dividend taxes for investors with incomes greater than $200,000. Some analysts think worries about a possible higher dividend tax were part of the reason Microsoft announced its multibillion-dollar special dividend this year, although the company denies that.”