Conventional wisdom is that tomorrow’s historic election will trigger a rally in over-sold U.S. equities, regardless of the outcome. This line of thinking is that the election—barring a disaster like in 2000—will bring finality to this seemingly endless campaign and a degree more certainty about which direction the nation’s government will head over the next two years. And, above all else, we’re told, the markets hate uncertainty. While such a rally is possible and would be most welcome by all but the most masochistic investors (and short sellers), we could foresee a couple of scenarios which could play out tomorrow that would not be terribly helpful to the markets.
Scenario one would be a replay of the 2000 election. Such an outcome, which could extend our political uncertainty for a number of weeks, would not play well in the markets, either domestic or global. Right now, the last thing that the traumatized and frail global economic system needs to confront is a contentious, bitter political dispute in the most important economy on the face of the earth. Hopefully, we will not see such a situation, but one would hope that both candidates understand the need to be magnanimous in defeat.
The second scenario which might not sit so well with the markets would be a major blow-out by Democrats which hands them a veto-proof majority in the Senate and reason to believe a widely-approved mandate to turn the wheel of state hard left. Most rational political observers do not believe that America is looking for a hard turn left and I am one of them. Americans are angry, afraid and terribly disillusioned with the economic and political mess we find ourselves in. However, out-going President Bush and his party are likely to feel the brunt of the anger. Congressional Democrats would do well to remember that their own approval ratings are actually lower than those of the President, generally not a good starting point when striking out in a bold new direction.
Economically, socially and from the standpoint of national security, American voters are largely center-right in their orientation. Broadly expanded government, redistributive tax schemes, larger union influence and massively reduced military spending during a time of enormous peril are not high on the agenda of average voters. Were Democrats to take a big victory tomorrow to mean that the nation wanted to move far left, I would expect their reign in Congress and the White House to be a short-lived experience.
The stock market would most likely not respond well to such a blow out. The prospect of higher taxes, more ponderous regulation, increased unionization and diminished free trade would spook this market and could overwhelm whatever good feelings may flow from the “change” that is coming, one way or the other, tomorrow.
The best case scenario from a market standpoint tomorrow would most likely be that of divided government. A McCain come-from-behind victory along with a smaller-than-60 seat Senate majority for Democrats would ensure that neither ideological side was able to run too far in either direction. Given the scarring political warfare of the last two Presidencies and the grave economic and security matters that face us, this outcome might also be best for the country. The real message from this election is that Americans want change in the way the nation’s business is being conducted. They want less cronyism, corruption and political warfare waged for the sake of politician’s egos and their own personal career ambitions with little thought given to solving intractable national problems. Both parties have let us down collectively in this mess and I seriously doubt that any one party has all the answers to fix the system by itself.
Hopefully, we will have a clean result Wednesday morning which will be respected by both sides of the political aisle and that whichever party wins will read the correct message from voters and not misinterpret the election results. The winners of these political contests face some of the gravest challenges confronted by American leaders in seventy years. This is a time for statesmanship and a steady hand, not wild-eyed ideology and mammoth government schemes to completely reshape an already wounded economic system. In reality, it was too much government interference, not Laissez-faire run amok that triggered the bulk of our current problems. It would be truly ironic were we to turn to government to fix problems that it did so much to cause.