Musings on the Election Outcome and Investment Returns

There’s a lot of different information and opinions flying around related to the upcoming presidential election, so I thought I’d add my 2 cents.  There are a few things worth watching, but in the end, frankly I don’t intend on making any theme-related investments leading into the election (or shortly thereafter).  I usually keep my eye on any disconnects from fundamentals or market asymmetric that occurs during market panics, flash crashes or bubbles forming, but right now, I think the market is behaving rather rationally.  Here are a few themes worth watching and what investors/media pundits are talking about:

Who Will Win?  Oddly, many national polls are now showing Romney leading on a total percentage of “likely voters”, yet the more widely followed sources indicate Obama is still favored to win the election itself.  Surely, this is partly a function of the electoral college, but also indicates the fallibility of polls.  As of this writing, Intrade (where people are betting their own money on the outcome, and has high volume and tights spreads) is showing Obama with a 63% chance of winning.  How, this was as high as 80% a couple weeks ago and has come down after the debates.  Even though Obama had picked up a point during the last debate, his odds haven’t improved must since.  In my mind, the final pivotal moment will be the final jobs report prior to the election.

Industries that Favor Each:  Many pundits and investors have pegged certain industries to benefit from each candidate.  Obama stocks include food, staples, health care services and farm equipment.  Romney stocks include coal stocks, financial services, oil, gas and electric.  And of course, many view gold as a beneficiary of further easy money policies, so you’d think that an Obama win would propel gold further .

Tax and Monetary Policy – Romney hasn’t stated explicitly that he’d remove Bernanke if he were to win, but many in the base are unhappy with the current easy money policy and we might see some tightening and an earlier increase in the Fed Funds rate than the previously portrayed several year run per the current Fed statement.  So, savers might finally see some increased returns on CDs, savings accounts and money markets.  This probably wouldn’t be favorable for stocks, as assets finally start to shift back into non-risk investments where they can earn a decent yield.  We’d probably see mortgage rates rise, while other rates would probably remain unaffected like those charged by credit card companies and short term loans.

In the end, like I said, I’m not shifting around my assets or sectors at all.  I actually think that no matter who wins, we’ll probably see a relief rally in stocks.  Since both candidates offer some pros and cons for specific parts of the economy, investors will breathe a sigh of relief and even if they didn’t like one particular candidate’s stance, at least they now know they can just get on with it.  The uncertainty in what to expect may well be a bigger detriment to valuations than the end result itself.