As more Americans have come to own stocks over the past 20 years, the stock market itself has become a leading indicator of presidential elections. One rule of thumb in this investor polling experiment is that a flat or down market in the 10 months preceding an election can spell defeat for the incumbent. In 1992, the broad-based S&P 500 was essentially flat, and the incumbent George H.W. Bush was defeated. In 2000, the index declined, and the proxy incumbent Al Gore lost in a cliffhanger. However, in both 1988 and 1996, the S&P rose more than 10 percent, signaling victory for respective incumbents Papa Bush and Bill Clinton.
 
Where are we today? Stocks, like everything else, are signaling a close call. Year-to-date, the S&P is higher by 1.5 percent, an underwhelming performance as far as Bush is concerned. However, since mid-August the S&P is up 6.2 percent, and in just recent days the whole stock market appears to be snapping out of its "bubble of fear" funk, to use economist Don Luskin's apt phrase. It's still possible that stocks are calling it for Bush.

 Luskin and others have pointed out that uncertainties surrounding this election, such as the possibility of a highly litigious voter recount, have created a risk-averse fear among investors. The theory goes that this has induced investors to buy safe-haven gold or gilt-edged Treasury bonds rather than more economy-revitalizing stocks.

 If the outcome of the election is unknown, the threat of terrorism at home and in Iraq could be much greater. This prospect has driven up oil prices. Even the announcement of Justice William Rehnquist's throat-cancer operation has clouded a potential Supreme Court decision. Subtract Rehnquist from the 5-to-4 verdict in 2000 and you are left with a 4-4 tie. And if we can't get it done here, how are the Iraqis supposed to do it over there?

 Despite all this, investors still prefer George Bush over John Kerry by a margin ranging up to 15 percentage points, according to numerous polls. Undoubtedly they favor Bush's tax-cut policy over Kerry's proposed tax hikes. After all, Bush's tax cuts have propelled a net 50 percent increase in broad stock market averages since October 2002 (using the Wilshire 5000 index), even despite this year's market sluggishness.

 Investors also know that the president's implementation of lower tax rates on personal incomes, investor dividends, capital gains and corporate profits have generated a much stronger economy than media reports would have us believe. In fact, just this summer consumer spending increased 4.5 percent at an annual rate, while business investment in capital goods expanded at a 12.5 percent yearly pace. All this will be reported in a third-quarter gross domestic product release just days before the election. Consensus opinion is that real GDP will fall between 4 percent and 5 percent. That could give Bush a strong push to the finish line.

 In elections in 2002 and 2000, roughly two out of every three votes were cast by shareholders. This pivotal constituency should be strongly attracted to the president's ownership theme of expanded tax-free savings accounts to reform Social Security and health care, as well as likely second-term efforts for broad-based tax reform.

 Kerry, on the other hand, proposes to raise taxes on capital formation, and he opposes tax-free savings accounts. He believes the economy is weak because Americans don't consume enough. A recent paper by University of Chicago economist Casey B. Mulligan strongly disputes this obsession with consumer spending.

 Mulligan argues that less taxation of saving and investment capital will actually spur consumer spending over time. This is because job-creating businesses require investment funding in order to grow. If you tax investment more, business funding will dry up, as will the job creation that generates the income necessary for consumer spending. Lower after-tax returns to investment (by raising dividend and capital-gains taxes) will actually weaken consumer-spending power. Actually, more capital formation from lower tax rates is the consumer's best friend, not his enemy.

 It is highly doubtful that your average investor-class member has read Mulligan's paper. But it is also likely that investors intuitively understand that you can't have income-producing jobs without healthy businesses, and that the nation will not produce strong businesses by taxing the very seed corn those businesses require. Investors may well know what John Kerry doesn't -- that you can't have capitalism without capital.

 The recent stock market surge may be an acknowledgement that Bush is the pro-growth candidate, and that if he remains energized in the last days of this campaign, his economy-boosting tax-cut policies will live to see another day.