The Market Loses If There’s No Clear Winner of The 2012 Election By Tomorrow

Jeff Uscher: By most accounts, Election 2012 is expected to be very close.  Long lines of early voters in key swing states including Ohio and Florida, the use of paper ballots in parts of New Jersey that were devastated by Hurricane Sandy, and uncertainty over the implementationof stringent new voter ID laws in several states could make for a very long night before the result of the election is known.

While no one expects the presidential race to be as close as it was in 2000, if it is close enough that post-election legal challenges to new electoral procedures could alter the outcome, the result of the election could be delayed for days or even weeks. The only real deadline is Dec. 17, when the Electoral College meets to cast their votes for president.

It is not just the presidency that is at stake, although that is the race that grabs all of the headlines.

Again, while no one is predicting that the composition of the House and Senate will change all that much, disputed Congressional contests could put control of the legislature in doubt.

Even within the two major parties, the endorsement or repudiation of Tea Party Republicans or extremely liberal Democrats by the voters will have an impact on how much wiggle room there will be for compromise, particularly regarding the resolution of the fiscal cliff looming on Jan. 2, 2013.

That is why clear winners in the race for the presidency and in the contest for the control of Congress, regardless of who those winners may be, are preferable to any uncertainty over the outcome of the election.

If There’s No Clear Winner of Election 2012

As discussed in Money Morning yesterday (Monday), the limited amount of time available after the election to resolve the fiscal cliff makes any time lost to legal challenges to the electoral process potentially very costly.

House Speaker John Boehner, R-OH, interviewed yesterday by CNN said, “Lame duck Congresses aren’t known for doing big things and probably shouldn’t do big things, so I think the best you can hope for is a bridge.” Boehner continued, “I would think that would be the best you can hope for, and even that is going to be very difficult to do.”

Former Democratic House Majority Leader Richard Gephardt, D-MO, told Reuters, “‘I’ve thought for a long time that when they finally get to … the lame duck, that everybody will have to blink because there’s not time’ to tackle all the tough issues at hand…Gephardt…also noted that after the elections, there will be plenty of defeated or retiring members of Congress who “just don’t want to spend a lot of time on this stuff.'”

Wall Street is betting that a muddled electoral outcome will make compromise more difficult in a lame duck session.

Financial Advisor magazine wrote on its Website, “When one looks back at what happened during the budget negotiations in the summer of 2011, investors should remember that a more than 10 percent decline in the Standard & Poor’s 500 didn’t bring Congress to its senses.”

Given the expectation that any compromise will be difficult and, perhaps, impossible if the election results are contested, market volatility can be expected to increase dramatically, rising to panic as we approach year-end.

Volatility would not be limited to equities, particularly if the outcome of the presidential race is in doubt. Fed chairman Ben Bernanke’s second term ends in 2014. President Obama is likely to replace him with Janet Yellen, who would likely continue Bernanke’s activist policies and is well-known by the markets.

But Mitt Romney strongly objects to Bernanke’s accommodative monetary stance and would replace him with someone, such as Glenn Hubbard of the Columbia Business School or Harvard’s Greg Mankiw, who would might move to reverse Bernanke’s dramatic expansion of the Fed’s balance sheet.

Market speculation over which president will appoint what Fed chairman would add enormous uncertainty-expressed as volatility-to interest rates, bonds and currencies.

Regardless of which candidate you favor for president, get out and vote. And hope that we have a clear winner tomorrow morning.

Related: Dow Jones Industrial Average (INDEXDJX:.DJI), S&P 500 Index (INDEXSP:.INX), SPDR S&P 500 ETF (NYSEARCA:SPY), Dow Jones Industrial Average ETF (NYSEARCA:DIA).

Written By Jeff Uscher For Money Morning

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