Yesterday, the market flat lined ahead of the election and we saw a light round of buying near the close. Traders have squared up and they will wait for the results.
Almost every poll points to an Obama victory. However, most of the polls weight Democratic turnout at 2008 levels (or higher). That was the highest Democratic ratio we’ve seen in decades. Many analysts feel that fewer Democrats will vote this time around because President Obama did not deliver on his promises. Republicans are enthused after the debates and they are excited about their ticket. I believe the ratio will decline.
Four years ago, Democrats turned out in record numbers ahead of the election (absentee ballots and early voting). Obama had a commanding lead heading into Tuesday. That is not the case this time around and the margin is much tighter. We are also seeing bigger crowds at the Republican rallies than we did four years ago.
I am not trying to make a political statement here; I am trying to handicap the outcome of the election. This looks like it will be a very tight race. Obama has a slight edge heading into the election and that is offset by the independent voter edge held by Romney. This will all come down to voter turnout for each party today.
Nothing else really matters the rest of the week. The economic releases are light and retailers will start posting earnings. European credit concerns are subdued and Greece is voting on austerity plans later this week. China’s economic conditions are gradually improving and they are preparing for a leadership change.
The backdrop is stable. Once the elections are over, the focus of quickly shift to the fiscal cliff. Politicians will barely reconvene and then they will leave for Thanksgiving. December is not a productive month because of the holidays and nothing will get done during the lame-duck session. At best, politicians will find a way to postpone the fiscal cliff for a couple of months.
If both parties can’t reach an agreement, tax increases will take effect January 1. As we draw closer to that date, the selling pressure will increase. Investors will take profits while capital gains taxes are low.
I believe Republicans will lose a few seats in the House, but they will retain the majority. The Senate looks like it will stay in the hands of Democrats unless Republicans turn out in record numbers.
Obama is viewed by traders to be less” market friendly”. If he is reelected, we might see a small relief rally, but that will be short-lived. He has not prepared a budget in four years and he was not able to resolve the debt ceiling in 2011 (we will be bumping up against it before the end of the year). Traders will worry that both parties will remain divided and that they won’t be able to postpone the fiscal cliff.
If Romney is elected, the market could rally the rest of the week. However, the honeymoon will end quickly. He was able to reach across the aisle in Massachusetts, but he is likely to hit heavy resistance in Washington DC. Democrats know that he wants to repeal Obamacare and they will not greet him with open arms.
From a trading perspective, I believe the market heads lower either way. It will continue to slide until politicians find a “quick fix”. All of the puzzle pieces are in place for a nice year-end rally if the two parties can find middle ground.
There is one negative overnight scenario. If the vote is very close and we don’t know the results for another week, the market will decline. It hates uncertainty and in 2000 (Bush versus Gore), the S&P 500 dropped almost 20%. This looks like a very close election and it is possible.
I am not trading today and I am not going to hold any overnight positions. If SPY $140 is broken tomorrow, I will buy puts. If the market rallies after the election it will rally above SPY $143. I will stay on the sidelines until it falls back below $143 – then I will buy puts.
If politicians take a casual approach to the fiscal cliff, we will see a sharp, nasty decline. That will get Washington’s attention. I believe politicians are aware of the stakes and they will try to find a solution. However, that does not mean they will succeed.
Take pleasure in knowing that this all comes to a head today. If you live in a battleground state, you will finally be able to watch TV again.
Exercise one of your biggest rights today and vote for love of country.