Why The Stock Market is Rooting for Obama

I’m going to do something I don’t generally like to do here and delve into the realm of the political.  Not because I want to, but because I think this has major market implications.  In the Orcam Investment Research I’ve been discussing some of the major trends that are currently steering the market.  One of those trends is the Presidential election and the uncertainty surrounding it.

First of all, the policy outcomes from the two candidates are unlikely to move the needle in any diverging manner, in my opinion.  I actually think Romney is a closet Keynesian who will come in and run deficits just like Bush did.  He’ll just do it through tax cuts, etc.  So I think the big budget cuts from the Romney camp are election talk.  Clearly, Obama isn’t in favor of big cuts at this point either so I don’t think we’re looking at big changes there.

But the market uncertainty (at least in the near-term) is a removal of stimulus due to Fed policy. Romney has been very clear that he doesn’t approve of QE or the Fed’s policies under Bernanke.  He’s explicitly stated that Bernanke will not be Fed Chief past 2014.  What the market is really rooting for is the continuation of Bernanke’s policies so the market is indirectly rooting for Obama.  The perception under QE is that the Fed will do whatever it takes to keep asset prices elevated.  And as long as the Bernanke Put remains in place the market is reassured believing that downturns simply won’t be sustained.  Whether or not Romney could even move the needle on Fed policy is unimportant because the risk will be priced in regardless.  The market hates uncertainty and Romney’s victory would put Fed uncertainty front and center for all of 2013.

I think Romney picked a poor battle with the Fed during the election campaign.  And in doing so he became the anti-market candidate.  After all, it’s not a coincidence that the odds of Obama’s re-election has correlated very highly with the S&P 500 in recent months (Chart via Safehaven):

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • seam

    And yet on a medium or lobger term view a non Obama adminsitration would be much better for the economy – greater reliance and expoloitation of domestic energy, passing a budget instead of a series of continuing resolutions, tax simplification, a plan to deal with entitlement reform….. So while I agree a Romney win may be the catalyst ofr a correction, replacing Treasuries with reserves should never be viwed as supportive for equities.

  • DJ

    Anybody taking on the Fed (whether politically or intellectually) is good. You don’t like the Fed policies under Bernanke either, isn’t it?

  • Jonny

    Don’t you think a re-election of Obama would increase the risk of the fiscal cliff turning into a drag on US growth, which could support buying Treasuries all selling equities?

  • Dismayed

    “And yet on a medium or lobger term view a non Obama adminsitration would be much better for the economy – greater reliance and expoloitation of domestic energy, passing a budget instead of a series of continuing resolutions, tax simplification, a plan to deal with entitlement reform….. ”

    That, sir, is a fantasy. Oil prices will continue to be set by OPEC, coal and gas exploration will continue as before, and Romney’s budget numbers do not add up. Tax simplification? Don’t forget that Congress is the legislative branch.

  • Tom

    Disagree. Every republican from Reagan forward has been shown to be one who cut taxes WHILE expanding spending. (Not sure if thats been true for Gerald Ford and previous) So they talk a big game about cutting spending but instead increase spending while cutting taxes, under the guise of trickle down – i.e. growth is going to offset that lost revenue. Bush II is of course the poster child as we are still waiting for all the (non bubble) growth from 2001 and 2003 to “trickle down”.

    (Note – I am independent)

  • Andrew P

    If a Romney victory produces a nice sell off, that could be a good buying opportunity.

  • sean

    I said greater reliance and exploration of domestic energy. That is not a fallacy as an Obama guided EPA would do muuch to curtail fracking and exploration on both federal and private land – Romney would expand federal land use. No argument here that OPEC sets price and I would go farther and say the Saudi’s as the marginal producers set the price. That does not eman however that the US could not enjoy the same benefits as Canada when it comes to exploiting more natural energy resources.
    As for tax and spending, with the debt at over 16 trl there is just less appertite for a further spendin. A Romney/Ryan win would signal this. Congress is the legislative branch and has proposed and passed in that chamber rational budgets.

  • jjames

    couldn’t disagree more.. the market has been very sluggish lately as it prices in an obama victory. and romney is unclear on what his stance on the fed is.

    the market does does embraces obamas failed economic policies or his ideas about raising taxes on investors.

  • jjames

    ………..and pigs can fly!

  • Cowpoke

    As obamacare starts rolling out this will be the most unpredicable cost shift in the economy. Wallstreet should be very concerned about this huge elephant in the room.

  • William Bedloe

    I think many enclosed in the bubbles of learning institutions, offices on Capitol Hill, the media and possibly even Wall Street are vastly overestimating Obama’s chances. From the ground, it looks like a rout of Obama and the Democrats is coming.

  • http://www.stableinvesting.com Ryan Melvey

    Cullen,

    You might be reversing causation. Perhaps a stronger market is helping Obama rather than the other way around… I am not sure but it is worth addressing both possible sides.

  • Walt

    enough with the trickle down talk, it doesn’t exist. its just become a political punching bag. here’s Thomas Sowell’s analysis: http://www.tsowell.com/images/Hoover%20Proof.pdf

  • http://Avondaleam.com Scott Krisiloff

    Performance of S&P 500 in November in an Election Year:

    Average of All years since 1952 1.33%
    Average When President Re-elected 2.23%
    Average After One Term Presidency 6.19%

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ JasonH

    the worst result is if Romney or Obama puts in a deficit-hawk as Fed Chair like Vlocker, who increased interest rates to 18%+… it’ll kill the economy (and the real reason inflation abated in the 1980s is because the US moved from burning oil for electricity–burning oil was the 2nd largest source of electricity– to instead using natural gas as the 2nd largest source of electricity. This alleviated the 400% oil price hikes from OPEC that caused the stagflation starting in 1973.

    So the question is whether Romney or Obama are even greater fools/deficit-hawks then they say they are?

    I prefer Green Party candidate Jill Stein who actually incorporates/pushes for more deficit spending & closest to Monetary Realism or MMT than Republicans/Democrats.

  • Mikael Olsson

    Now if we had a few hundred years of these statistics (and the world looking much the same during these centuries), and separated the numbers out into phases of recession-recovery-normal-peak, THEN those numbers might be useful.

  • Crosscreek

    Agree. I have saying since the August rally that the market wants Obama. So obvious after the 1st debate when we started getting bear market behavior on Romney chances.
    Who can argue against that anyway? Rallying from 666 to 1470 in 4 years is not a market that hates the current status quo.

  • Jim

    OK, Cullen, you asked for it. Here’s an opinion from a political Independent, no matter who’s elected.

    Geithner: gone (he’s served his purpose and there will be a bidding war among big banks for his talents, such as they are).

    Bernanke: gone (you are the leak, Roche, and it’s embarrassing as hell that he’s never been a banker).

    Ed DeMarco: gone (this Bush “interim” appointee to Fannie is like the proverbial 3rd rail — no one wants to touch that one and keeping him on has surprisingly not appeased the Republicans).

    But I hope everyone votes anyway.

  • George H

    I think you underestimate the tax impact an Obama second term will bring.

    I think we sell off no matter who wins. Not saying this is the beginning of a down trend.

  • xDTJx

    Markets will rally if Romney wins, its that simple.