Today is the day, John McCain and Barack Obama square off and clearly the expectation is an electoral win for Obama. If you need evidence of the the social market trend, take a look at http://www.intrade.com/ Clearly the share price of Obama has gained and the share price of McCain has fallen and this system is actually remarkably accurate in calling election, wall street, republican, democrat, contests.
So the market is up today, the assumption is that Wall Street prefers a Republican (generally speaking), but out of 6 election year bear markets since 1960, Ronald Reagan was the only incumbent party to retain control over the White House in 1984. The odds favor Obama regardless of the polling assumptions. A change in market direction from a down (Bear) market to an up (Bull) market typically coincides with a change in party, also typically occurs in none other than-November! The other stereotype is that Wall Street prefers divided government, one in which the House, Senate and White House are divided by party control. The truth is there is really no historical evidence to suggest that the market fares better under these circumstances and there is plenty of evidence to suggest just the opposite over the last century.
The recent action in the market is marked by a decrease in volatility, this is a welcomed event and as I've mentioned many times since the start of September, Octobers tend to end Bear Markets. The decrease in volatility is exactly what the market needs to pull sidelined cash back into it.
So what assumptions can we make about today's market in relation to the elections? One of the first things I teach in my Stock Market course is that the market is a discounting mechanism that forecasts or attempts to forecast events 6-12 months out in the future. So a sustained market rally this month would roughly equate an expectation that the economy will start a recovery in earnest within the next 6 to 12 months. In many ways the market is dumb, but in many ways, the very best and brightest are the ones operating in it. No one has better inside information regarding politics and government than market participants, they are tied into the loop in ways that the press could only hope and imagine.

Another theme is certainty. If there's one thing the market hates, it is uncertainty. That is why we say, "When the missiles fly, it's time to buy", not because the market loves war, but it loves the idea that the uncertainty leading up to a war (whether there will be one or not) has finally been resolved and planning can take place with that certainty in place. So could the market's recent lack of volatility be a hint that the market has found its certainty in an election win for Obama?
Taking a look at some of the industries that stand to gain or lose, things are jumbled and uncertain once again. Take for instance the fact the market is up today. While there can be many causes attributed to this fact, one could be the certainty of one candidate over the other, but looking at individual sectors that stand to win or lose, we lack clarity.
For example, take a look at these charts of Eli Lilly, Astrazeneca and Pfizer. All are up today, the notion is that a democratic win will be bad for drug makers, yet they are up today, granted on very low volume thus far. Another reason they could be up is the market is taking comfort that the Democrats WILL NOT pull of an upset and gain the filibuster proof 60 seat majority in the Senate.



Looking at the ETF for Energy, XLE, we can see thus far the energy complex is outperforming the broader market today as XLE is up over 6% and the broader S&P just over 3%. This could have to do with the dollar, but it could be an expectation that McCain will pull off an upset as the Energy markets clearly prefer a Republican over a Democrat.

Or again, it could be the feeling that the Dems won't pull off the 60 seat majority that would put the energy complex in dire straits.
Here's a chart of XLE in 2000 when the race was pretty tight, didn't look so good did it?

On November 3rd of 2004, you can see OIH-the ETF for the oil services sector had a lot of volume flowing in the previous week and it made an impressive surge after being down, probably denoting confidence in a GW Bush election win.

Here's a chart today of Northrop Grumman, a defense contractor and while it is up today, it has clearly formed a bear flag over the last month denoting the likelihood of further declines. This would seem to suggest that the defense industry is not too happy about an Obama win and fairly certain that one is coming.
Here's a chart of the ETF for the S&P 500, while it is up today, it looks very tentative and really has formed a bear flag of sorts.

Compare it with this chart from election day of 2004 when a Bush victory seemed pretty well in the can.

Not only were the SPyders up, but staged a decisive breakout of a long term trading range.
Now look at the SPY during the 2000 election cycle, hardly as decisive.

Finally take a look at this chart of Health Management Associates-hospitals/medical-down over 6% today

The notion is a Democratic win will not be good for this industry.
So what assumptions can be made? You look at the evidence and decide for yourself. I'm just pointing out market behavior. We'll know one way or another I suppose by this time tomorrow and I expect in either case, the market will be down later this week.
Labels: Barack Obama, bear market, coverage, democrat, election analysis, electoral, house, intrade, John McCain, republican, senate, volatility, vote, white house