There are three scenarios on how the financial markets after the election will unfold: one is if Romney wins, the other is if Obama wins, and the worst-case scenario, Americans wake up Wednesday and don’t know who won.
Former Massachusetts Gov. Mitt Romney speaks to delegates at the New Hampshire Republican Convention in Concord, N.H., Saturday, Sept. 25, 2010. (AP Photo/Mary Schwalm) President Barack Obama and Romney debate. (AP Photo/Charles Dharapak/ Mary Schwalm)
Tuesday’s the big day for Americans: Election Day. After the financial markets’ collapse in 2008, the S&P 500 once again has its all-time highs in its cross hairs. What can we expect from the financial markets after the election is over?
Financial markets after the election, if Romney wins
If candidate Romney wins, on the surface this looks like a big win for the stock market too. Romney’s plans are to cut taxes and deregulate. The energy, military and finance complexes would get a huge boost from a Romney win, on both tax and regulatory fronts. He would repeal Obamacare, which is good for corporate profits, but is a mixed bag for the sector itself, having winners and losers, if Obamacare is repealed. If Romney wins, the components of the S&P 500 just got a lot more leverage and profit margins will benefit from Romney’s plan, if put into action.
Long ago, in a galaxy far away, the stock market was driven mostly by earnings and interest rates. Today, with the Federal Reserve moving $40 to $80 billion a month, into the financial system, earnings and interest rates have taken a back seat to the Fed. Sadly, the Fed is the reason why stocks have rebounded so much from 2008, but the economy hasn’t followed in kind. The Fed has proven they can buy stock rallies and keep interest rates artificially low, but so far it has been unable to increase end demand for goods and services. Frankly, it has not helped the banks restart lending, either. My point is, if Romney wins the financial markets after the election would start to think about a world without the Fed flooding the system. Once the realization that the Kool-Aid is being taken away, the stock market would likely fall back significantly. Mitt Romney has stated he will not reappoint Ben Bernanke for a third term, which ends January 2014, and he disagrees with his loose monetary policies.
If Romney wins, there might be a short term pop in the financial markets after the election. But then I would expect to see a mass exodus from stocks. Big money managers looking into January of 2014 (which is not far away in a traders world), see the punch bowl being taken away, and will try to leave the party before the music stops. Recently, the stock market has already been cut down 5 percent on wind that Bernanke (add in third quarter reports and guidance were soft) may not seek a third term, even if Obama wins. A Romney win is good for the components of the S&P 500, but probably bad for their stock prices because it would negatively impact how the Fed manipulates the markets.
Financial markets after the election, if Obama wins
In this Thursday, Sept. 13, 2012, file photo, Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington. (AP Photo/Manuel Balce Ceneta)
If President Obama wins, not much would change in the financial markets after the election, for now. President Obama thinks Ben Bernanke is doing a good job and would likely go out of his way to persuade him into a third run. If Obama wins, some sectors might get hit like defense and banks, but that would probably be short-lived. The President is not going to stop the Fed. Traders and managers would likely feel relieved enough to try and gun the financial markets to near all-time highs, by the end of the year. If the President is re-elected, nothing will really change, which has been quite bullish for equities in the past four years.
In the event that I owned a bunch of stocks and mutual funds, I would be hoping for an Obama win simply from the perspective of my portfolio. However, if Romney wins, I would use any big euphoric pop to sell some holdings and then do some thinking. Think about this: If the biggest reason why stocks are up is the Federal Reserve’s manipulation, what do you think will happen if the new President lets the conductor of the manipulation go and practice sound monetary policy?
There is an unfortunate third scenario for the financial markets after the election. It is the 2000 redux. What if we wake up Wednesday morning and we still don’t know who won? Make no mistake the financial markets were tanking in 2000 before the election and the drama around the Presidential election was a side bar.
This go around, with the divide between the right and left these days, the gloves are coming off and it is going to get uglier than a Philadelphia sports bar after last night’s debacle in New Orleans.
That would be a super negative for stocks, if we don’t know who is president by Wednesday morning.
Source: VOXXI Blogs
This content is under a special licensing agreement with VOXXI and cannot be republished via our Creative Commons license. For more details, please see http://voxxi.com/creative-commons/