What the November Elections Will Mean for the Markets

 |  Includes: DIA, SPY
by: DayOnBay

The markets anxiously await the November 2 outcome.

The S&P 500 has had a great rally since September, gaining over 9%. This week the index almost spiked past 1200, a level not seen since early May of this year. Perhaps this is justifiable too; M&A activity has had a resurgence as many firms look to put their cash stockpiles to good use. Initial unemployment claims declined by 21,000 to 434,000 in the week ended October 23. Investors remain confident that a second round of quantitative easing and another positive earnings season is unfolding. Certainly, things have looked encouraging. But one of the most important reports of all awaits: the results of the American election on November 2.

click to enlarge

S_P500.pngClick to enlarge

Unemployment in the US has remained stubbornly high since the fallout of the financial crisis. What is more of a concern is that economists are still debating the root cause of this. Some have argued unemployment is a structural problem, whereas others suggest that insufficient stimulus and lack of economic growth are creating a sluggish labour market.

So what is driving the divide between supply and demand of workers? On October 11, three economists won the 2010 Nobel Prize for attempting to answer just that question. Their research revealed that despite a continuing number of job vacancies, an increasing number of people are facing systemic unemployment and that indeed structural problems were to blame. Data from the U.S. Bureau of Labor Statistics seems to validate this argument.

In August, the most recent month for which data is available, there were 3.2 million job openings, a 2% increase over July and a 33% increase year over year. Total overtime hours and worker productivity of existing employees has increased notably as well. Businesses are reluctant to hire new employees and would rather continue to squeeze the most out of existing ones.

A recent survey conducted by the Wall Street Journal of 200 employers shows that “Regulatory Uncertainty” is the most likely reason they would avoid bringing in a new hire.

How might the election results affect the labour market or the economy as a whole? Political deadlock. Deadlock would be achieved if the Republicans sweep one (partial deadlock) or both (total deadlock) houses of Congress with a Democratic Whitehouse. The GOP has a commanding lead in the polls already. The Republicans last achieved a political deadlock in 1994 under the Clinton administration. Starting in December 1994 (a month after the election), the stock market rallied 35% through 1995.

It is for this reason that Wall Street has usually cheered gridlock. This election could have a particularly strong effect on the stock market this time in particular. A deadlock would slow the legislative process and undermine the ability of one party to push through oppressive or otherwise harmful bills.

In other words, businesses would have less unpredictability to worry about and may start hiring again. This would alleviate much undesired tension in the labour market and perhaps persuade wall-flower investors to come back and buy stocks.

Further Reading

Disclosure: No positions