On Wall Street, quirky Iowa vote quickly upstaged

WASHINGTON (Reuters) - Wall Street gave a passing glance on Friday to the U.S. presidential election kickoff in Iowa, and didn't particularly like what it saw from Republican winner Mike Huckabee or top Democrat Barack Obama.

Attention quickly shifted to the U.S. employment report for December as investors scrambled to figure out whether the U.S. economy would slip into recession this year.

The government's data showed the U.S. economy created a scant 18,000 jobs in December, far fewer than the 70,000 that economists had predicted, and the unemployment rate jumped to 5 percent, the highest since November 2005.

Financial markets showed little reaction to the election news, but the stock market braced for steep losses while prices for U.S. government bonds soared after the employment report cast fresh doubts on the health of the U.S. economy.

The economy is likely to become a bigger factor in the U.S. presidential campaign in the coming weeks as it moves beyond Iowa and next week's New Hampshire primary into more populous states such as California and Florida. Investors will be listening for candidates' plans to fix the imploding housing market or cool inflation.

Those economic issues barely merited a mention in Iowa, where the Republican winner worried right-leaning Wall Street more than the Democrat.

Financial markets typically feel more comfortable with Republicans in power because they are generally more friendly to business on such issues as taxes and regulation. Huckabee, a Baptist preacher and former Arkansas governor, doesn't fit that mold.

"The scary thing about it for me is that he seems like a right-wing populist," said Charles Biderman, chief executive of Trim Tabs Investment Research in Santa Rosa, California. "I'm not sure what his economic platform is and who his economic supporters (are). We know who's backing Hillary (Clinton) and who is backing (Rudy) Giuliani. Huckabee is an unknown."

Wall Street likes to know what it's dealing with, and its bets were on Clinton and Giuliani -- frontrunners in national polls going into Iowa -- to eventually win the nominations.

The concern with Obama's victory was that polls show him as more electable than Clinton in November, raising investors' fears that Democrats would end up controlling both Congress and the White House.

"An Obama presidency would be the worst outcome because every Democratic legislation ... will sail right through, including big regulatory plans and the like," said Chip Hanlon, president of Delta Global Advisors Inc in Huntington Beach, California.

DES MOINES VS DETROIT

What makes Iowa an anomaly for Wall Street is more than just the quirky way it chooses candidates, opting for small gatherings in living rooms or schools rather than voting booths. When it comes to many of the big economic issues, Iowa's interests run counter to the rest of the country.

While $100 oil grabbed the headlines this week and raised the specter of 1970s-style stagflation, expensive energy helps Iowa's ethanol industry. As one of the largest U.S. corn and soybean growers, Iowa benefits from the high grain prices that have made food more expensive for the average American. Iowa's housing market hasn't suffered the same boom-and-bust cycle that has devastated states such as California and Florida.

Ray Fair, a professor at Yale University who devised an economic model 30 years ago that has proved remarkably successful in picking presidential election winners, said economic growth and inflation in an election year were the key to predicting which party would prevail.

Bottom line, if the U.S. economy slips into a recession, Republicans have little chance because the incumbent party is virtually always blamed for election-year economic trends.

Voters are "looking around to see how their family's doing, their neighbors. That's all highly correlated with employment and output growth," Fair said.

Steep energy and food prices make for an interesting dynamic in the current election because Americans have not faced serious inflationary pressure in 20 years.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government who served on President Bill Clinton's Council of Economic Advisers, said those pocketbook issues weigh heavily on consumer confidence. The worse the mood on Main Street, the more likely voters are to kick out the incumbent's party. Recent data shows confidence at its lowest level since the aftermath of Hurricane Katrina. Friday's employment report could further sour sentiment.

"Voters are heavily influenced by what is happening in the economy right now," Frankel said. If the U.S. economy slips into recession, "it would be a very strong negative indicator for the incumbent party."

(Additional reporting by Yinka Adegoke, Ritsuko Ando and Ken Li in New York; editing by Doina Chiacu)