Why the US Market Rallied Even Before Vote Was Over

At the end of the day—this day at least—it may not even matter who wins the election.

CNBC.com Barack Obama & John McCain

The simple notion that this Election Day marked a potential turning point for the economy and a departure from the current state of affairs was enough to boost investors' spirits and send the stock market higher.

While there are no guarantees in elections or the economy, there was a sense that the election-time rally may have some legs.

"It's a sense of absolute relief that some definition today will arrive," says Diane de Vries Ashley, managing partner of Zenith Capital Partners in Coral Gables, Fla. "People are expressing 'enough is enough' and things are not as bleak as they appear to have been and now we can get down to business."

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Investors have tired of viewing bad news and were looking for any stimulus to start buying stocks again, she says.

And Tuesday's hotly contested presidential race between Democrat Barack Obama and Republican John McCain seems to be providing the perfect excuse.

"There is very definitely a different feel in the air and from clients," de Vries Ashley says. "I think the sense of panic that we have felt for a very, very long time has abated. People are beginning to read their October statements to see the grimness. Once they get over that shock I think they're willing to sit back and say, 'How are we going to fix this horror?'"

Conventional Wisdom?

Markets have rallied 15 percent in the week prior to this election, a move that has surprised some observers. Front-runner Barack Obama's higher tax policies combined with the near-certainty of Democratic control of Congress defies the conventional wisdom that markets like lower taxes and at least some gridlock on Capitol Hill.

But at a time when investors are desiring something different—"change" for lack of a better word—it seems as appropriate time as ever to chuck conventional wisdom out the window.

In fact, the latest political punditry suggests that Obama not only wins the presidency but also carries a potential filibuster-proof majority of 60 senators with him.

The election and your portfolio. See video at left.

"That flies in the face of the whole market-likes-gridlock expectation," says Michael D. Cohn, chief market strategist at Atlantis Investment Management. "It throws a little more of the uncertainty principle into the political equation and the taxation, and the whole situation not knowing what they're going to do with all this power that they're going to have."

Yet Cohn maintains a bullish perspective overall on the market, even though the tumult of October forced him to temper an aggressive buying strategy he had planned. Instead, he's been "trying to nibble and nibble and nibble" while planning to put cash into stocks at a stronger pace when the government enacts an anticipated second fiscal stimulus package.

"It was way overdone on the downside," Cohn says of October's 14 percent stock plunge. "You can pick up some of these companies dirt cheap."

He said he's going to be looking at metals, basic materials and oil companies, as well as alternative energy firms that are likely to get a big bounce particularly in the wake of an Obama victory.

"I think that play comes back once this cash that's literally been dropped out a helicopter starts hitting the ground," he says.

Still Some Unbelievers

Despite expectations of a second economic stimulus measure and government bailout money circulating through the financial industry, the economy still is likely to struggle under the weight of unemployment pressures and a weakened consumer.

That has some bears, like Kathy Boyle, president of Chapin Hill Advisors in New York, wary of any election-time rally and continuing to hold a dim view of the market ahead.

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"The average consumer is doing everything they can to hang on to their homes, but they're up to their eyeballs with credit cards," Boyle says. "I think people are too nervous to spend money."

If McCain wins today, Boyle sees the Dow Jones industrials getting as much as a 1,000-point bounce. But if a President Obama follows through on proposals to raise taxes on the highest earners, that could have a chilling effect on both private investing and in business growth, she says.

"I think that Obama getting in and trying to sort things out could have very negative effects for the stock market because the rich are going to feel like they are being pounded," Boyle says. "We got ourselves into this. It's going to be very long and ugly and I'm afraid the stock market's going to react very negatively as we go through these gyrations."

Boyle has been playing inverse exchange-traded funds aggressively through the market downturns. Those funds pay investors double or more for moves lower on various stock indexes, but the risk is significant as investors can get burned badly if they bet incorrectly.

Going forward, Boyle likes the Direxion Nasdaq 100 Bear 2.5x Fund , which raises the stakes to 2.5 times the moves of the market's main technology index. She also favors short-term bonds and gold and will be watching iShares and Rydex ETFs for plays that capitalize on various market moves lower.

"We're still very bearish overall, still really protecting our principle," she says. "This is a very, very different market. There's no safe place."

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