US Presidential Election: How Will The Market React?

Calm Before the Storm

NEWS: One day before (Monday) the world finds out who the next president of the United States will be, the US stock markets closed virtually flat. The Dow (^DJI) closed down 5 points, less than 0.1% after spending the early morning in the green and the afternoon in the red. The S&P 500 (^GSPC) lost a quarter percent or 2 points. The NASDAQ (^IXIC) gained 5 points or 0.3%. The small-cap stocks also eked out a small gain of 0.2%.

THE BOTTOMLINE: The ISM Manufacturing number was released this morning and it was worse than expected and has not seen such dismal levels since 1982. The economic news has not improved the last week, however the market has done extremely well - has the market finally discounted the recession and all the bad news? I would have to give that an overwhelming yes. Sure there could still be some unforeseen situation in the future that keeps the market from rallying, but in my mind the bad news is priced into stocks and last week too much was priced in and that is why stocks rallied. There was also a bit of short covering last week as traders locked in gains, which added to the buying pressure. Overall the market looks good in the intermediate-term and should continue to slowly make its way higher as the daily volatility remains. BUT, there is one big wildcard this week - the election. Read below for some of my thoughts on this world changing event.

How Will the Market React?

NEWS: By tomorrow (Tuesday) night we should have a good feel for who our next president will be. Then again it could turn into 2000 when we did not know for weeks. Hopefully we will not have to deal with the latter.

THE BOTTOMLINE: There are a few scenarios that could play out tomorrow and the market will likely react differently to each. The first includes an Obama victory and the Dems taking total control of Congress. This will result in all the power lying in the hands of one party and with Obama talking tax hikes during a recession that includes raising the capital gains tax - the market will not like this outcome. Do not take that I am against Obama and the Dems, but honestly you cannot tell me raising capital gains taxes will be good for stocks?

The second scenario has Obama winning, but the Republicans doing well in the other races and regaining the ability to filibuster. This would be a good scenario for stocks because it will keep the government in a gridlock - the less the government is involved, the better.

The final scenario has McCain pulling an upset victory and again keeping the government in gridlock as well as extending the Bush tax cuts. This would be the best-case scenario for the stock market in the short-term.

I will keep my political beliefs to myself, but I think investors/voters must realize that higher taxes during a recession coupled with raising capital gains taxes is not good for stocks. This does not suggest stocks will not move higher in the coming years if this scenario comes true, but they would have an easier time with lower taxes on capital gains because it will help an ailing stock market and incentivize investing in stocks and saving. Punishing investors for making money in the stock market is not the way to promote our economy and more specifically our stock market. The reason I brought this up is because both parties have failed to spend much time on this subject.

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