Monday, November 3, 2008

U.S. Election's Impact on the Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In a perfectly free market, politics has no impact on trading and prices. The U.S. not only doesn't have a free market, but since the credit crisis began has veered increasingly toward dominant government control of the financial system. The election tomorrow is not likely to reduce that control, but instead shift it to other areas. The Bush administration has created de facto corporate socialism in the U.S. with the Wall Street bailout bill being the culminating event. An Obama administration will change the emphasis of programs toward the individual. Expect profitability for financial companies to be squeezed for at least the next four years and probably beyond as a result.

Obama is not only going to win tomorrow, but is likely to receive a mandate larger than the 6% plurality predicted on average by the polls (the New York Investing meetup predicted an 8% margin last Wednesday, the win could be even larger). While the presidential election is a forgone conclusion, a filibuster proof senate is still up for grabs. Legislation can be delayed or even stopped by a filibuster in the senate, unless 60 votes can be put together to end it. The chances of the Democrats achieving this goal have increased substantially in the last week. Three more Republican senators, - Dole in North Carolina, Coleman in Minnesota, and recently convicted felon, Stevens in Alaska - look to be in trouble. Chamblis in Georgia is still incorrectly considered safe, although his support took a nosedive after he voted for the bailout bill, by the political pundits. Early voting in Georgia indicates a well-above average African American vote in the election so far and this will defeat him if the numbers stay high. Seats could be lost by the Republicans in Mississippi and Kentucky as well. Whatever happens with the senate seats on election night, don't expect any improvement in 2010, since most seats that will be up then are now held by Republicans and a shift toward the Republican party that year would only manage to preserve the balance of power that was established in 2008.

A Democratic lock on the election process will not be considered a positive by the U.S. stock market. Even as of today though, it doesn't appear that this has been priced in. Only the trading on Wednesday and to some extent on Tuesday (information from supposedly secret exit polls flows to the major Wall Street players) will let us know. Any sell off should help to firmly establish a market bottom. Failing to break the lows of October 10th in the days following the election should be interpreted as a confirmation that an intermediate term bottom was already put in (the absolute bottom could be a year or even several years off however).

Voters don't leave the comfort of their homes to stand in line for four or more hours to express an opinion if they are happy with the status quo. This behavior has been seen throughout the United States in early voting and indicates an electorate that is angry and demanding change. Turnout is heading toward a record percentage for a modern U.S. election (ignore all comparisons before 1920 when women didn't have the right to vote), which would be anything above 135,000,000 votes. Since there are 187,000,000 registered voters (out of an eligible population of 213 million) as of the latest count, this target is more than possible. Expect the political shift that is taking place to create a shift as to what works in the markets as well.

NEXT: The Stock Market's Early Returns

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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