I’m going to do something I don’t generally like to do here and delve into the realm of the political. Not because I want to, but because I think this has major market implications. In the Orcam Investment Research I’ve been discussing some of the major trends that are currently steering the market. One of those trends is the Presidential election and the uncertainty surrounding it.
First of all, the policy outcomes from the two candidates are unlikely to move the needle in any diverging manner, in my opinion. I actually think Romney is a closet Keynesian who will come in and run deficits just like Bush did. He’ll just do it through tax cuts, etc. So I think the big budget cuts from the Romney camp are election talk. Clearly, Obama isn’t in favor of big cuts at this point either so I don’t think we’re looking at big changes there.
But the market uncertainty (at least in the near nterm) is a removal of stimulus due to Fed policy. Romney has been very clear that he doesn’t approve of QE or the Fed’s policies under Bernanke. He’s explicitly stated that Bernanke will not be Fed Chief past 2014. What the market is really rooting for is the continuation of Bernanke’s policies so the market is indirectly rooting for Obama. The perception under QE is that the Fed will do whatever it takes to keep asset prices elevated. And as long as the Bernanke Put remains in place the market is reassured believing that downturns simply won’t be sustained. Whether or not Romney could even move the needle on Fed policy is unimportant because the risk will be priced in regardless. The market hates uncertainty and Romney’s victory would put Fed uncertainty front and center for all of 2013.
I think Romney picked a poor battle with the Fed during the election campaign. And in doing so he became the anti-market candidate. After all, it’s not a coincidence that the odds of Obama’s re-election has correlated very highly with the S&P 500 in recent months (Chart via Safehaven):