Friends

With the election less than two weeks away and having been asked by many of you, I thought I might take a moment to discuss the market ramifications depending on who wins the White House. First let’s assume that President Obama wins a second term. Many of you have asked what in the world will happen to the stock market if Obama does win and of course no one knows for sure, but we will venture our best guess. The first thing that we will be watching is what the market does leading up to the election. All things being equal (and they never are), stocks are likely to fall for a few days if the President wins re-election. But, if stocks continue to struggle before the election, pricing in an Obama win, then you might just see stocks rally after a day or two of selling. As is the case with earnings reports and stock action, often the worst is priced in ahead of time. If stocks rally into the election, and the President wins, I would expect a rather sharp and immediate sell-off for several days after.

Now let’s assume that Governor Romney is the winner on November 6th. Once again, what stocks have done leading up to Election Day will be an important factor, but all things being equal; we should see a short term stock rally on a Romney win. You may have noticed I said short term. The reason I don’t think any Romney rally will last is because trader’s attention will be quickly turned to the fiscal cliff. My guess is that the political venom from the left will be abundant as they will claim that the Republicans did nothing but obstruct President Obama for four years and now it’s their turn to be obstructionist. If I am wrong and there is a hint of cooperation then a more sustained rally should ensue.

So to recap the short term reactions, an Obama win is likely negative for stocks (unless we sell-off in anticipation) and a Romney win is likely positive for stocks (unless we see a rally ahead of time). The longer term prognostications are a little more complicated. If President Obama wins, then it is likely that the Fed and Government “all in” strategies could continue to be good for stocks into 2013. Now, the global growth story could derail this party, and the potential of shrinking earnings would be difficult for the market to overlook, but if global economies can simply muddle along, then one could make a case for higher stock prices in 2013. Now, we would argue that stocks rising on easy money and frivolous spending policies is not a good long term foundation to build upon, but for 2013 the party could continue.

If Romney wins, we could actually suffer short term pain, as the dollar is likely to strengthen and the talk of getting the debt under control would actually threaten short term growth prospects. The good news would likely be that businesses would have a clearer view of what they are going to have to be dealing with for the next four years. Businesses would also likely feel that they have a government more “in their corner” and depending on whether Obama care is tossed out and taxes are lowered, hiring more employees would seem to be more likely. If, like us, you would like to see real underpinnings to stock market advances, the short term pain would likely produce a more sound foundation to build on.

Ok, let’s try to summarize once again. An Obama win should produce a few days of selling of stocks, then a continuing of the punch bowl rally. The risk is one of diminishing returns (which we have pointed out and seem to be coming true), and an eventual realization that the sugar high will someday end. A Romney win should produce a couple of days of rising stock prices followed by a bit of a sell-off when market participants realize that the punch bowl rally may be ending, and dealing with reality (austerity) is painful. The hope would be that over a longer period of time the strength of the dollar and a budget under control would provide a “real” foundation on which to build a long term sustainable stock rally.

Just one more point. Don’t get too caught in which party is good for stocks and which isn’t. We have had good stock markets during the Reagan era and Clinton era. Unfortunately, there was a crash right at the end of each of those bull markets. And, of course if you look at the past 4 years, you may not be impressed with our economic ennui, but stocks have had a substantial rally under a Democratic presidency. So, really, it is too simplistic to say one party is good for stocks and one is not. Stocks can go up and down for reasons that are counter intuitive with regards to politics.

Have a nice evening everyone.

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