The U.S. presidential election is a discomfiting time
for those strategists accustomed to changing investment
positions after minute analysis of the carefully measured
comments of Ben Bernanke, Mario Draghi and other central
Markets have a tendency to overinterpret what these bankers
say, because at times so little of their true thinking is
However, when it comes to elections, the opposite is true.
Politicians promise the earth to win over the electorate and
then deliver much less.
Morgan Stanley encapsulates this slightly unreal world of
political promises in a recent currency note, saying:
While we know what the candidates stand for, we will only
know after the November 6 election day how much these policies
may have to lean towards compromise. Hence, the long-term
implication of the outcome of the election may be very
different to the initial market response.
A rational response is, therefore, to glean those promises
that are more likely to be delivered, from the mass of more
doubtful practicality looking mainly at Romneys
promises, since Obama would broadly maintain the status
Mitt Romney, the Republican challenger, proposes a more
business-friendly tax regime, including a cut in corporation
tax from 35 to 25 percent steeper than the promised
reduction by Barack Obama, the Democrat incumbent, to 28
percent. Lower taxes for business are key to Romneys
pledge to boost the supply side of the economy, so one can
assign a relatively strong likelihood to their implementation.
These tax cuts would support U.S. equity prices across the
board, by increasing corporate earnings.
Looking in more detail within equities, Romneys
promise to increase defense spending and encourage oil and gas
drilling would benefit companies in the sector. The other side
of the coin is alternative energy, championed by Obama but not
by Romney, whose stock prices would suffer a hit if the
Republican candidate won.
However, other possibilities look more uncertain.
Romneys more hawkish line on quantitative easing (QE)
could potentially prove fertile ground for short-term
preelection betting but the strategy has its flaws. If
he wins, he is likely to appoint an inflation hawk to replace
Bernanke when the Fed chairmans latest term ends in
January 2014. This could mean that QE ends earlier or is
reduced in size in future years. Morgan Stanley says that if
markets price in this possibility following a Romney victory,
the yield curve would steepen: Investors would sell Treasuries
further out along the curve in the expectation that these
longer-dated bonds could no longer rely on the Fed life-support
machine. A reelected Obama would, however, be likely to
reappoint Bernanke or a chairman with similar views
allowing Treasury yields to remain low for a long time.
Following this logic, many analysts believe an Obama victory
will, by allowing a looser monetary policy, weaken the dollar,
with a Romney triumph boosting it.