Wall St braced for post-poll turbulence

Regardless of the results of tomorrow’s US presidential election, the next four years will be a tough act to follow from Wall St’s vantage point.

The benchmark Standard & Poor’s 500 Index has rallied 66% since President Barack Obama took office — one of the most impressive runs ever for stocks under a single president. Admittedly, the timing of his inauguration just before the market hit a nadir in Mar 2009 is part of the reason. The national polls lean toward a win by the president.

“The market might like the fact of an Obama win since it would mean less uncertainty,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, in Cincinnati.

Strategists say the market’s pattern of late also suggests status quo — an Obama win. A “Romney rally” is a 1-in-3 possibility, taken betting site InTrade’s odds of an Obama win at about 67% right now. Other prognosticators put his chances of re-election even higher.

The most recent Reuters/ Ipsos tracking poll shows both candidates garnering 46% of the vote — but polling averages show Obama with small but critical leads in swing states Ohio, Virginia and Iowa.

There’s a conventional line that a victory by long- time businessman Romney would be better for the equity market, given his bias for fewer regulations and lower corporate tax rates. Still, any move in the market, no matter the outcome, is likely to be limited.

“The market has priced in an Obama victory, but no matter what, any knee-jerk reaction after the election will unwind over the next few days,” said Joseph Tanious, a global market strategist at JP Morgan Funds, in New York.

“The fiscal cliff is also on everyone’s mind, but that will really take hold after the election, since the winner could indicate what happens,” he says.

Strategists at LPL Financial have been tracking two baskets of stocks to judge if the market believes Obama or his challenger Romney will emerge with a win. The “Obama” stocks include healthcare facilities companies, food and staples, utilities, construction companies and homebuilders. The “Romney” stocks include financials, coal stocks, oil and gas drillers, telecom, and specialty retail names.

The Obama index peaked in early October, before the first debate, largely seen as being won by Romney. Yet in terms of “relative strength,” the index still favours the president.

The move in the market in Obama’s administration was partly due to timing as the economy recovered from the deepest recession since the Great Depression.

The Federal Reserve has used three rounds of asset purchases as a way to keep interest rates low and stimulate the economy as the recovery from the recession has been painfully slow.

Romney has criticised the Fed’s policy and is seen replacing chairman Ben Bernanke with someone more likely to tighten monetary policy. The Fed’s current policy stance is seen as helping Obama. Consumer confidence recently rose to a more than four-year high, and housing prices are rising again. However, unemployment remains at 7.9%.

Regardless of the winner, the market will have one less uncertainty to deal with. It will shift its focus to the €466bn in mandated cuts and tax increases that could kick in next year and send the US economy reeling — if a deal to prevent it is not reached.

The possibility of a new recession has many market participants counting on resolution, with the election as a variable in terms of when any legislation will pass — not if it will happen.