The Day After The Election – What Will The Markets Do?

by | Nov 1, 2008 | Investment

bull-market.jpgIndulge me in a little prognostication. I am not a timer and I don’t change investment directions accroding to “what I think” markets may or may not do. Still, I enjoy a little theorizing from time to time, so here goes.

If my hunch is correct, those of you expecting the markets to tank if Obama is elected will be disappointed. The markets have nowhere to go but up the day after the election. Here’s why.

If you know a little bit about the stock market, you know it’s often a predictor of future economic events. The rule of thumb is that the market is typically about six months ahead of the current economy. That being true, the market isn’t very impressed with what is coming down the economic pike.

One of the many economic issues the market reacts to is tax policy. The higher the taxes that businesses and corporations pay, the less money there is for dividends. And the less money paid out for dividends, the less buyers are willing to pay for those companies, meaning stock prices decline.

While there are many factors driving down the stock market these days, I haven’t heard one talking head suggest that one of the reasons for the recent market crash is who the market believes may be the next president and who will control Congress.

Of the two candidates, neither of whom would pull a “D” in an economics course, McCain would probably do the least damage to the economy. That is because McCain is opposed to increasing taxes and favors decreasing the tax on businesses (the second highest in the world). Obama has clearly favored increasing taxes on “the rich.” Additionally, we need to factor in that there is a high probability the Democrats will have a filibuster-proof majority in the Senate, guaranteeing that Obama’s tax increases will happen.

Again, higher taxes mean lower profits, which means sinking stock prices. I believe that one of the factors contributing to the recent market crash is a firm belief by the “smart money” that not only will Obama win the White House, but the Democratic party will have a super majority in Congress.

My best guess is that if Obama wins the presidency, which Rasmussen gives 9:1 odds that he will, I am looking for the market to pretty much shrug it off. This is what the markets expected. If the Democrats fail to gain a 60-seat majority in the Senate, you will see a slight rally. And, if McCain pulls off the upset, Katie bar the door. We may see the first 1,000-point rise in a day in the Dow’s history.

Remember, you heard it here first. If I am embarrassingly wrong, of course, this post may simply and mysteriously disappear from the blog.

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