The Election, Markets, and the Economy

Earlier this week, on November 2nd, I found myself asked, like many others, what my take on the election, markets, and the economy are likely to be.

Today, November 4th, markets registered an enormous pop across the board. I had mostly expected this in the immediate aftermath of the elections, but regret that I had not published these views here. However, I did leave my trail in a few other locations, where I wrote:

>Ok so it looks like the GOP is all set to take control of the house.
>What do you think will the impact be on the US economy, positive or negative and why?


Market will pop as people celebrate that companies can do what they want again and won't be regulated anymore and taxes are likely to go down for them.

Government spending will be cut or at least stalled. Unemployment benefits will no longer be extended. Aggregate demand will drop. It will be double-dip time for the US economy, and there will be no one at the wheel to coordinate any response, except perhaps Ben Bernanke. QE2 is unlikely to be very effective in the absence of fiscal policy, since money will flow to banks who will simply sit on it to repair their own balance sheets. The tax and regulatory changes will make it easier for companies to hire and grow, except that there won't be much demand for them to grow into. Those savings are more likely to be invested abroad.

Markets will eventually realize that the recession is back or that growth has slowed in the US and will either do a big jolt downward (if they still see the US as a core engine of global growth) or slide slowly (if they decide that US companies can keep afloat based on selling to foreign markets). QE2 may help exporters by devaluing the dollar and making our exports less expensive (and our workers more productive in global terms).

In another location (see comment by “Bruman,” I argued more or less the same result.

Bruman Says:
November 1st, 2010 at 11:21 pm

I’m actually highly qualified to do political analysis, but how the election will impact the markets is tricky because what is baked in and what would consist of a “surprise” (other than clear outlier events) is hard to fathom.

My sense is that a Republican win will result in a market pop on the theory that regulatory reform is dead, taxes are more likely to stay low in the short term, and corporations will be allowed to do more or less whatever they want. There may be a medium term expectation that this will displace Obama in 2012. Even to the extent that this is currently expected in markets, the removal of uncertainty due to the election should reduce yields/push prices up.

However, at some point, people will realize that a gridlocked government – while often positive for markets when times are good – is going to be terrible for addressing structural problems in the economy. The austerity that Republicans are likely to introduce may also tip us into a double dip after all. Depending on how quickly people discover this, the market is likely to slide afterwards, probably around the new year, but possibly earlier.

Now, today’s market jump is most likely attributable directly to the Federal Reserve Bank’s announcement of $600 billion in quantitative easing, but these effects most likely interact with the results of the election to generate an extra strong result.

In any case, I mostly posted this to keep track of my expectations for the post-election economic and market environment. We shall of course later see how events actually pan out.

The Election, Markets, and the Economy

Earlier this week, on November 2nd, I found myself asked, like many others, what my take on the election, markets, and the economy are likely to be.

Today, November 4th, markets registered an enormous pop across the board. I had mostly expected this in the immediate aftermath of the elections, but regret that I had not published these views here. However, I did leave my trail in a few other locations, where I wrote:

>Ok so it looks like the GOP is all set to take control of the house.
>What do you think will the impact be on the US economy, positive or negative and why?


Market will pop as people celebrate that companies can do what they want again and won't be regulated anymore and taxes are likely to go down for them.

Government spending will be cut or at least stalled. Unemployment benefits will no longer be extended. Aggregate demand will drop. It will be double-dip time for the US economy, and there will be no one at the wheel to coordinate any response, except perhaps Ben Bernanke. QE2 is unlikely to be very effective in the absence of fiscal policy, since money will flow to banks who will simply sit on it to repair their own balance sheets. The tax and regulatory changes will make it easier for companies to hire and grow, except that there won't be much demand for them to grow into. Those savings are more likely to be invested abroad.

Markets will eventually realize that the recession is back or that growth has slowed in the US and will either do a big jolt downward (if they still see the US as a core engine of global growth) or slide slowly (if they decide that US companies can keep afloat based on selling to foreign markets). QE2 may help exporters by devaluing the dollar and making our exports less expensive (and our workers more productive in global terms).

In another location (see comment by “Bruman,” I argued more or less the same result.

Bruman Says:
November 1st, 2010 at 11:21 pm

I’m actually highly qualified to do political analysis, but how the election will impact the markets is tricky because what is baked in and what would consist of a “surprise” (other than clear outlier events) is hard to fathom.

My sense is that a Republican win will result in a market pop on the theory that regulatory reform is dead, taxes are more likely to stay low in the short term, and corporations will be allowed to do more or less whatever they want. There may be a medium term expectation that this will displace Obama in 2012. Even to the extent that this is currently expected in markets, the removal of uncertainty due to the election should reduce yields/push prices up.

However, at some point, people will realize that a gridlocked government – while often positive for markets when times are good – is going to be terrible for addressing structural problems in the economy. The austerity that Republicans are likely to introduce may also tip us into a double dip after all. Depending on how quickly people discover this, the market is likely to slide afterwards, probably around the new year, but possibly earlier.

Now, today’s market jump is most likely attributable directly to the Federal Reserve Bank’s announcement of $600 billion in quantitative easing, but these effects most likely interact with the results of the election to generate an extra strong result.

In any case, I mostly posted this to keep track of my expectations for the post-election economic and market environment. We shall of course later see how events actually pan out.