It is a foregone conclusion that the Republicans will win the House of Representatives at the end of the day tomorrow. Virtually every generic ballot has the Republicans up. The lowest of them is +4. In a normal election, +4 is a convincing margin. Most generic polls are +8 and above. Before one decides how to trade the market, it’s important to analyse some data.
Since the end of August, expectations of a Republican win have creeped into the stock market.
At other sites like Intrade.com, evidence of the Republican wave can be seen in the probability that they will control each house of Congress. They have a 91.8% chance of controlling the House, and a 47.8% chance to controlling the Senate.
After the 2008 election, the Democrats thought they would have a lasting power base. In pure seats, the Democrats had a 233-199 disadvantage in the House. The margin in the Senate is 59-41. Of course, they had the Presidency for the first time in 8 years.
Expectations currently vary widely in the amount of seats the Republicans will pick up in the House. The range is from an ignoring reality 40, to a pie in the sky 100. Gallup settled on a floor of 60 today. Nate Silver has it pegged at around 53.
The Senate is a lot more difficult, but a good gauge of the nation. From polling data, it looks like the Republicans will pick up 8-9 seats. If they win Washington, and California, odds are good we will have an even split in the Senate, or that Mitch McConnel will turn President Obama into President Irrelevant.
In polls of Obama versus a generic Republican, Obama loses. He also would lose in a head to head battle with former President George Bush. That shows how unpopular he is.
The market has priced in a Republican House and a gridlocked Senate.
As the election unfolds, it will be important to focus on how big the Republican wave is. If it looks like a tsunami, 60 seats or more in the House, 9 or more in the Senate, then expect a continued rally on Wall Street. If the results come in as expected, the market should sell off just a little. The old traders convention, “Buy the rumour, sell the fact.” will hold. If the Democrats hold onto most of the Senate, and Republicans only pick up the low, 40 seats in the House, expect the market to sell off sharply.
The psychology of the marketplace is not “gridlock is good”. That was Clintononian. The players in the market do not expect Obama to moderate like Clinton did. They are very different people. Clinton was interested in power, and truly enjoyed the job of being President. Obama sees himself as a revolutionary. Obama wants to fundamentally remake America into a Western style social state. The psychology of the market is that the programs that Obama has put into place will go away.
Any short term trading that one engages in will just ride short swings in the market. It’s more important to think about what to throw money into over the long haul. There are three scenerios.
First, assume a massive Republican wave that continues into 2012. Republicans will gain governorships as well as the Presidency. Assuming that they have learned their lessons and will incorporate huge budget cuts, along with tax cuts, and that is a big assumption! There is a chance that we will avoid the coming hyperinflation due to the Obama economic agenda.
In this case, plow your money into stocks, short precious metals, and the interest rates will slowly drift higher. The dollar ought to stabilise, or even strenthen. The fiscal discipline the Republicans will be able to enact will make Obama and his wishes not relevant. If the wave is huge enough, even left over Democrats might feel pressure to over ride Obama vetoes.
Second, assume that the Republicans have an as expected victory. They control the House, but not the Senate. In this case, the Obama agenda moves forward, albeit at a slower pace. Hyperinflation will come to the US. Gold will rally. Interest rates will generally drift higher. The dollar will lose value. Hard commodities should increase in value. There will be a massive public fight between Speaker John Boehner and President Obama. Right now, the mood of the country is with Boehner.
The stock market will not rally, but go sideways. Certain stocks will be good to buy. These are the stocks that benefit from inflation. Multinational corporations are good bets. Another good bet when there is inflation is a stock like CME Group. (for the record, I own the stock) Why CME? They trade 98% of the commodities in the US. With hyperinflation, the interest rate markets and currency markets at the CME should increase in volume exponentially. Since 62% of every revenue dollar floats the bottom line, and CME pays a big dividend, investors should be in fat city. Hopefully, the appreciation in the stock outpaces the rate of inflation.
Third picture is that all these polls are wrong. Republicans narrowliy win the House, don’t make a dent in the Senate. In that case, the stock market will take a dump. The march to a socialized Western European economic model will quicken. There will be relatively few safe havens in this type of market. Precious metals will be one. Gold could easily rally to $2300/oz, the 1980 inflation adjusted high. The stock market will not be a good place for money. Foreign currencies will be a better investment than the dollar. Interest rates will have to rise significantly to combat inflation. In 1979, short term 3 mo rates hit 21% at one point.
If you are able, it would be better to invest your money in a small entrepreneurial growth business. If the busienss is successful, it should outpace any inflation. Scalable businesses that are software based are a good place to look. Groupon, Mint.com, Facebook, Google, and businesses like this are examples of what small entrepreneurial businesses can do. Even in the face of massive inflation, businesses like that will grow. Creating them or finding them is the difficult problem.
I dont think that anyone should simply pass this election off as simply a bad economy. People are smarter than that. This is really about the response to the economic crisis. Obama put into motion all kinds of socialist programs. He relied on neo-Keynesians to manage his economic policy. Americans learned that these programs don’t work, and learned Keynesian economics didn’t work way back in the 1970’s. This election really is about a choice; Socialism or Capitalism. Big government versus small government.
If the Republicans think that they can rely on old forms of governing, they will be passe quickly. Recall, the Tea Party only was started in March of 2009. Americans understand the power of the internet. They want flatter more personalised government. Government needs to take commoditized service and personalise it. Let the consumer choose. Big centralized programs don’t work in this new age. What we need is iGov.