Investors see trade, taxes as key in White House race

By Herbert Lash

NEW YORK (Reuters) - The threat of growing protectionism and higher taxes are the issues nearest and dearest to investors as the U.S. presidential election gathers steam this week with Tuesday's primary in New Hampshire.

Barring upset wins by either of the two candidates that worry Wall Street the most -- Democrat John Edwards and Republican Mike Huckabee -- the outcome on Tuesday is not seen as having an immediate market impact.

Nevertheless, the primary is being closely tracked as it stands to provide investors clarity about who may emerge as each party's standard bearer in the November presidential election.

"The single-most important issue that threatens the market is protectionism. The market can shrug off taxes because those are just adjustments ... essentially it's a one-time thing and you move on," said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.

"But the on-going implications of protectionism are really far-changing and change the course of our economy and have just enormous implications for the market," Ablin said.

Illinois Sen. Barack Obama led New Hampshire polls going into Tuesday's contest among the Democratic field. For Republicans, Sen. John McCain of Arizona was ahead of Mitt Romney, a former governor of Massachusetts.

Protectionism is a major concern among investors because many fear tariffs and other mechanisms may curb economic growth instead of spurring domestic demand as politicians hope.

"None of the Democratic candidates would give me any confidence in the economy because we're talking protectionism, which is always, always extraordinarily bad. We're talking about tax hikes, redistribution and none of that is good," said Mark Coffelt, president of Empiric Funds in Austin, Texas.

"(Former President Bill) Clinton was very free trade, but I'm not sure (Sen. Hillary) Clinton is very free trade. And I'm not sure Huckabee is very free trade, and the rest of the Democratic side clearly are not even close," Coffelt said.

Ablin called Huckabee a loose canon while Obama, who he said is "somewhat hawkish" on trade, would be willing to get tough on China. "The most aligned with the market would likely be (Republicans Rudy) Giuliani or Mitt Romney," he said.

TAXATION

The top Republican candidates have endorsed extending President George W. Bush's tax cuts, except Huckabee, who proposes eliminating federal income and payroll taxes and to replace them with a federal consumption tax at the retail level.

Giuliani, a former New York City mayor, has proposed cutting the corporate rate to 25 percent from 35 percent. McCain supports extending Bush's tax cuts, although he voted against them in 2001 and 2003, saying they also did not include spending reductions.

Among Democrats, Edwards wants to increase the tax rate on long-term capital gains to 28 percent from 15 percent, and tax dividends as ordinary income. Obama favors a rate of between 20 percent and 28 percent on capital gains and dividends.

Obama may be viewed as more likely to raise taxes, said Jill King, senior portfolio manager at Horizon Cash Management LLC in Chicago, which she said is not positive for companies in general and not stimulative to the economy.