The market is reaching a 'major tipping point'

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If there is one thing that is obvious about the relationship between market behavior and the upcoming presidential election, it is that investors clearly believe that a Hillary Clinton victory will be bullish for stocks and other risk assets and a win by Donald Trump would not be.

Evidence the market action after the presidential debates, where the S&P futures rallied after each one and just look at the reaction this week when the polls shifted in Trump's favor on the heels of the reopened FBI investigation.

With Clinton, markets think they know what they are getting on the belief her presidency would provide little change from the previous administration. With Trump, the thinking is who knows what we are going to get. Unfortunately, it's a bit more complicated than that for both.

If Hillary wins and the Democrats regain control of the Senate, that can't be good for healthcare stocks, particularly in the pharma/biotech space where worries over government 'cost controls' will only grow. For financials, the regulatory noose would only intensify if Elizabeth Warren had the Senate to herself.

Bernie Sanders would also want his pound of flesh in the Senate and energy companies as an example won't happy. While the Republicans would keep control of the House, they would be fighting with one hand tied behind their back. If Republicans maintain its lead in the Senate, we would certainly see a more effective check and balance.

If Trump wins, the initial market reaction will be negative, almost Brexit like because of the unknown's he would bring to office. Yes, lower taxes and a loosening of the regulatory straight jacket that has strangled the nation's businesses would hopefully lead to quicker economic growth. But, what if he gets away with his seemingly protectionist trade agenda?

He seems to want to renegotiate every trade deal ever done and for what purpose? Protecting the American worker? Sounds great but turning the free trade tide upside down is not the way to do it. Making America a more competitive place to do business is the answer. Also, what is he going to tweet from the White House at 3am and what foreign leaders is he going to piss off?

While I completely understand the markets obsession with next week's election, deservingly so considering the bizarre campaign and the two hugely flawed candidates, the winner won't be the determining factor for markets in 2017.

That instead will be driven by what has moved the market bus over the past seven years: Central bankers. Where interest rates go from here, both market based rates and those directly moved by central banks will be the thing to watch next year.

The artificially low level of interest rates both on the short and long end of the yield curve has created asset bubbles not only in fixed income but in equities, art, antique cars, comic books, baseball cards, etc.

I'm of the belief that the 35-year bond bull market is over where the plunge in yields post Brexit was the final blow off. If I'm right on this and interest rates start heading higher in a more pronounced fashion, asset prices of all kinds, particularly credit and for stocks, are about to hit some major turbulence where some small rumblings are already being felt.

Bottom line, as much as who the next president will be is hugely important for many reasons, I don't want investors to lose sight of what has been the dominant factor in markets for years because that same dominant factor, a.k.a central banks, will continue to be a huge presence moving forward.

We are however reaching a MAJOR tipping point in the markets' opinion of the policies of central banks and that opinion is not for the better. Therefore, expect market turbulence and the growing odds of a recession and bear market in 2017 regardless of who wins next Tuesday.

Commentary by Peter Boockvar, the chief market analyst for the Lindsey Group and co-chief investment officer at Bookmark Advisors. Follow him on Twitter @pboockvar.

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