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 bankers.  

Markets have a tendency to overinterpret what these bankers say, because at times so little of their true thinking is revealed.

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 Romney’s promises, since Obama would broadly maintain the status quo. 

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 Romney’s 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, Romney’s 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.

Romney’s 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 chairman’s 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.