Handicapping The Election’s Impact On Stocks

Markets are idling today ahead of tomorrow’s election.  Volume is the lowest it’s been since the lazy days of August.

The question we need to ask today is what the likely impact of the election will be on stocks.  I want to be clear that I’m approaching this purely from the perspective of the election’s impact on stocks and not politically.

All the polls and InTrade suggest that Obama is going to win.  The most recent WSJ/NBC poll, conducted over the weekend, said that 51% of likely voters favor Obama versus 43% who favor McCain.  InTrade speculators are convinced Obama will win with contracts on an Obama win pricing in a 90% probability versus a 10% probability for McCain contracts.

My feeling is that an Obama win is bad for the stock market.  That’s because Obama is likely to be less tax friendly, especially as far as capital gains taxes.  Plus, his economic policies will lean more towards regulation than free markets.  An Obama win tomorrow, then, is likely to result in some kind of a selloff for stocks.

A McCain win, on the other hand, would probably result in a decent rally for stocks.  That’s because markets are discounting mechanisms and they’ve surely been pricing in an Obama win, since he’s been so far ahead in the polls, at least to some extent – though I don’t believe an Obama win has been entirely priced in to the market.  A McCain win would constitute a genuine surprise, and a positive one as McCain is a Republican and therefore more tax and business friendly.

According to The Wall Street Journal, turnout could shatter records with an estimated 153.1 million projected to cast votes, or 73.5% of the eligible population.  That would be the highest since women were given the vote in 1920, beating the previous high of 72.1% set in 1964.