Here we are. At last the campaign is about to end and America will choose its next president. At the end of whatever chaos ensues in a close vote, the next president will emerge. What will the next four years in an Obama term mean to stocks? What would the first four years of a Romney term mean to stocks? Many subscribers have asked for my thoughts on this, so we'll run through them here.
A Barclays survey of 354 clients between Oct 24 and 26 found that most think Obama would be good for bonds while Romney would be good for stocks. This reflects existing trends that have created high bond prices and low rates, with the alternative presumably offering the flip side of the coin. This may be too simplistic, though.
High bonds and low rates have everything to do with the Federal Reserve, almost nothing to do with the White House. The Obama administration has not been good for the economy, yet somehow the economy has improved in the past four years and stocks are up 60 pct. Despite political finger pointing, the current crisis began before Obama and even before Bush. I've pointed out in the past that the roots of the subprime crisis extend back to the Clinton administration. He's the president who signed away the protections of Glass-Steagall, which had prevented for nearly seven decades the very banking meltdown that ensued just eight years after he dismantled it. Even before Clinton, however, the forces of banking darkness conspired to make what happened possible.
So, a string of presidents failed to stop the deregulation of banking and it finally blew up on Bush's watch. He was as surprised as anybody and by coincidence of the calendar handed the keys to the White House over to Obama in the heat of the calamity. Obama continued what had been started by the Treasury and the Federal Reserve under Bush, making it unclear whether what has happened should be credited to or blamed on Obama or Bush. Neither, actually. Credit market recessions take a long time, and couldn't care less which corporate-backed candidate temporarily occupies the Oval Office.
As for the government's horrific balance sheet, it's bipartisan. About the untenable US budget deficit, Ben Bernanke said back in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago." That was nearly six years ago, so now the right time to start was about 16 years ago.
The economy was cratered by subprime and it would have taken a long time to recover no matter who was president. Could more have been done by the Obama administration? Without a doubt, but none of his rivals offers a compelling reason to think they would have performed any better.
Romney's main talking point has been that his five-point economic plan will create 12 million new jobs. Straight from his website, the plan will "end the middle class squeeze of declining incomes and rising prices, bring back prosperity, and create 12 million jobs during his first term." The five points are: achieve energy independence with domestic resources, improve education, stop unfair trading practices in China and improve economic ties with Latin America, cut the deficit, and champion small business.
Obama offers a six-point economic plan with a goal of creating 1 million new manufacturing jobs by the end of 2016. Straight from his website, the plan will "grow the economy from the middle class out, not the top down. We can't just cut our way to prosperity, and we can't go back to the same failed policies that caused the economic crisis and punished middle-class families." The six points are: innovate to create manufacturing jobs, reform the tax code to create more jobs and reduce the deficit, end wars and redirect resources toward rebuilding America, develop clean energy in America, improve education, and expand health-care coverage.
Neither of these multi-point plans is groundbreaking, neither encouraging. Points we can dispose of out of hand are improving education, cutting the deficit, and achieving energy independence. Both sides list these in every election because they're tried and true bromides. Who can ever not want to improve education, cut the deficit, or achieve energy independence? Nobody, thus thumbs-up all around. Which side has ever actually made real progress in education, the deficit, or energy independence? Neither.
Why? This is a big question, central to every four years being like the election four years prior, or eight years prior. Both sides are funded by the same interests. The education issue is more about demographics than government policy because different subgroups of America perform at wildly different academic levels. No plan out of Washington is going to rid the country of such subdivisions, both parties know it, so the bell curve persists. On the deficit, each party shares the goal of reduction but neither party offers the details. On energy independence, both sides know that we need to switch to sustainable energy but are backed by fossil fuel so make incremental progress or no progress while pointing to a distant horizon we can all dream about.
With those three bromides out of the way, we're left with a two-point plan from Romney and a three-pointer from Obama. Romney: better overseas trade conditions, and better small-business policies. Obama: create manufacturing jobs, end wars, expand health care.
Of these, Obama's is the easiest to see through simply because he's already been in office for four years. We've seen his health-care ideas and they're unpopular with an enormous percentage of the country, admittedly before much of the plan has been implemented, but nonetheless it's not really a "new" plan when Obama talks health care. On the ability to create manufacturing jobs and end wars, much less was delivered in the past four years than was promised four years ago, which makes it hard to put much faith in what's being promised now - especially since accountability will no longer be an issue. (Then again, is it ever?)
On Romney's remaining two points, it's equally discouraging. Overseas trade conditions are not what's hurting America's economy, but an improvement would by definition be welcome, so, great. Contributing to 12 million jobs, though? No. Reducing taxes on small businesses, reducing regulation to make job creation easier, and improving the parts of Obamacare that are a burden on businesses do seem promising. Again, not a lot of details, but at least the specific concepts make sense. One of the 11 total points on the table between the two plans provides a vague possibility of improvement, then.
Unfortunately, the main benefit of the Romney message, the creation of 12 million jobs, is not possible through that one point alone and, even when considering the evidence cited by the Romney campaign, is highly suspect. According to Romney, here's how the 12 million jobs break down:
7,000,000 from tax reform
3,000,000 from energy independence, which means drilling
2,000,000 from trade improvement
Details matter. Let's look at some.
The 7 million is from a study by Rice University Professor John Diamond, and covers a 10-year period. That part gets left out, so "low-information" voters naturally assume that the 7 million jobs will appear in the coming four years. Well, I suppose truly low-information voters don't assume a darned thing because they're baiting a hook or swilling a beer instead of breaking down the Romney jobs plan. A casual observer, instead, naturally assumes 7 million jobs in four years. Nope, 10 years.
The 3 million is taken from a Citigroup Global Markets study that was not specific to Romney's proposals, but just concluded that 2.7 million to 3.6 million jobs could be created in eight years based on current trends and policies in place. That means we'll get the 3 million regardless of who's president as long as he doesn't screw anything up.
The 2 million is taken from a 2011 US International Trade Commission report suggesting that Chinese IP abuse has cost the US 2 million jobs. Economists differed immediately, but we don't even need to consider whether the estimate is accurate because there's no possibility that a Romney administration is going to rewrite China's intellectual property rules to match those in America. Even if it did, why would doing so create in America the jobs that Chinese people began doing in place of the Americans that would have had those jobs if China hadn't stolen the IP in the first place? What will really change the situation is American businesses realizing who can and can't be trusted and adjusting their partnerships accordingly.
We're left with just 7 million jobs, then, over a 10-year period. That's 700K per year, or 58K per month. Guess what? We created 171K last month, 148K in September, 192K in August, and have averaged 157K per month this year. The economic plans and hopes for the future offered by our two candidates for the White House are pretty uninspiring, wouldn't you say?
Frankly, the two choices before us are all but irrelevant to the direction of the economy, and the stock market is even less connected to the economy than most people think. The Federal Reserve is what matters most to stocks, which is why we watch it more closely than any other institution, and the Fed has spelled out what it's going to do in the near term. It has stated bluntly that Congress, not the White House, needs to prevent the fiscal cliff from cratering the recovery trying to take hold. It's meeting with policymakers and Treasury officials to try orchestrating a solution, though nothing serious is likely to appear until December.
The truth is that in all but a few exceptional cases in US history, the economy does what it's going to do and the person sitting in the White House reacts in one of two ways. If the economy is good, he takes credit and cites all the positive data that his administration supposedly delivered. If the economy is bad, he blames the prior administration or other forces beyond his control, and says that his effective policies simply need more time. You think I'm taking these examples directly from current headlines because the bad economy reaction so perfectly matches Obama's, but I'm not. It's always this way, with Obama providing just the latest evidence.
The tepid recovery would have gone how it's gone regardless of whether Obama or McCain had won in the last cycle. The forces that drove the debt to the moon originated with the stimulus package that was assembled in autumn 2008 largely independent of input from Bush, which was only big enough to create gobs of debt without being big enough to actually restart the machine. Ditto Obamacare, incidentally. It, too, represents the worst possible route: Not truly affordable care of the type that single payer would have provided, but not truly market-based care that a lower tax base and open insurance market would have provided. Nope, we got the high taxes with only partial coverage that still lets prices spin out of control.
This lack of difference between the two major parties is why so many liberals complain about Obama and so many conservatives complain about Romney. Nobody is voting for anybody, just against the one they see as the worst of the two. Can't stand Obama? Vote for Romney. Can't stand Romney? Vote for Obama. Can you remember the last time you really loved a candidate? Actually, for some it was 2008 on the mantra of hope and change. That the enthusiasm is so much lower this time around highlights the yawning gap between campaign promises made and governing achievements delivered.
Which brings us to the barest truth of all. Even if either campaign had shown us what it would do for the economy and we tried projecting what that would in turn mean for financial markets, we'd have wasted our time. Campaigns and governance are worlds apart. Bush, who wanted to avoid foreign entanglements, charged into the Iraq War. Obama, who would get the economic bus out of the ditch, hasn't achieved anything beyond what the organic baseline recovery scenario forecasted. Modern presidents do either none of what they promise, or things they never even discussed - and with limited effectiveness at that.
So, then, what will either candidate mean for stocks? Not much. The good news is that this frees you to vote on other factors. Of course, a look there will turn up nothing more meaningful than our look here. It's been a long time since worthy leadership occupied the White House.
I'm afraid we have longer yet to wait.