Stocks are likely to get a bounce after Tuesday's presidential election, but worries about the economy and credit crisis may keep the rally short.
While the election remains important to the market, expectations of a Democratic victory may already be priced in, market watchers say.
Polls have shown for weeks that Democrat Barack Obama has a fairly substantial lead, so analysts think only an upset win by Republican John McCain could have a significant impact on stocks.
"I'm not necessarily sure we're going to see a significant change in the next week, primarily because I think the market's already betting on a Democratic win and it would only be a Republican win that could change the market in the short term," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y.
Kresh thinks Wall Street already has rendered its verdict on the prospect of an Obama victory and the Democrats retaining control over Congress.
"I believe that the market believes that a Democratic Congress and a Democratic president is probably not a good thing," Kresh says. "If the market is nervous about that, it should already be reflected in the market. And a McCain election would be a surprise."
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Stocks tend to do better in November and December when an unpopular leader like President Bush leaves office. October also tends to be the worst month of the year during such times, as this one has been so far.
But stocks may not fare well in 2009. The market tends to decline an eaverage 4.5 percent in years after an incumbent party loses the White House, according to the 2008 Stock Trader's Almanac.
Some traders think there is a connection between the recent drop in stocks and Obama's rise in the polls. The last time McCain had a consensus lead in polling was Sept. 11, which was the market's most recent high. Since then the Dow industrials have fallen about 20 percent.
"A lot of times the way the market works is fear-driven, and the worst-case scenario is already factored in there," says Jordan Kimmel, a fund manager at Magnet Investment Group in Randolph, N.J.
But the market's huge selloff is mostly the result of an unprecedented financial crisis, which is pushing the economy toward what many expect to be a long and painful recession. That has also been the main factor behind Obama's rise in the polls, as many voters view him as better able to handle a struggling economy.
"My best guess is we see a rally in November regardless of the outcome of the election," Kimmel says. "Should McCain actually win I think you see a gigantic rally, but I'm not expecting that at this stage."
Some actually see an Obama victory as a positive for the market.
"The opponents of Sen. Obama often criticize him because he's so popular outside the US," says Bruce Fenton, president of Atlantic Financial in Norwell, Mass. "But from a market standpoint we have lost a tremendous amout of foreign investment—over a trillion dollars. The perception of global investors, the foreign policy and just the diplomacy of Barack Obama would be seen as a big positive outside the US."
But others worry that one-party control in Washington will not be a good thing for investors.
"If Obama wins in a total landslide and has both houses in his pocket, you might get some pushback on that," Art Cashin, director of floor operations at UBS, said on CNBC. "Usually the market doesn’t like everything all in one hand." Cashin talks about the election in the accompanying video.
"What's going to be important is not just choosing the White House but the composition of the Senate and the House," adds Quincy Krosby, chief investment strategist at The Hartford. "At the end of the day markets tend to like a bit of gridlock."
Yet some market watchers believe the election is not at the top of the priorities list on the trading floor.
With stocks hampered by so many other factors, such as credit tightening, consumer weakness and the specter of a recessionary economy, politics is only one of many factors.
"The election is a small uncertainty at this point," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "Once the election has passed, people can position themselves based on what they know or expect from the candidate that gets in."
And stocks still face enormous headwinds, no matter who wins the Oval Office.
"It's still going to be a very bumpy ride, especially if the hedge funds have not completed all of their selling," he adds. "It wouldn't surprise me to see the market try to get its feet under it and try to move a little higher, but I'm not looking for any great gains to back where we were. It's going to take a long time to repair the damage the market's suffered."