Presidential Elections and the Economy: The Impact Is Not Good

It is clear that the markets are being driven by uncertainty and a lack of clarity regarding the upcoming elections. The level of uncertainty or risks can be gauged by the ^VIX which has risen to record levels over the past month and by the gaps between corporate bond yields and yields on U.S. Treasury bonds which are also approaching record levels.

Chief among the political uncertainties are the U.S. presidential elections. The primary reason for the level of market angst is measured by the contrast in the competing visions of the two candidates---one supporting more government less business oversight (Obama), and one advocating a more free market approach to the economy (McCain). This is made clear by their approaches to U.S. trade policy. Obama advocates a policy of more government intervention and move to what he terms "fair" trade. This has clear and negative implications for stocks such as the Dow 30 which depend heavily on the free flow of goods and services across borders. McCain has been much more supportive of the free and open flow of goods and services across borders. This has clear and positive ramifications for stocks such as the Dow 30. Thus one could assign at least a portion of the recent downdraft in the Dow to the ascendancy of the Obama campaign.

However, regardless of who wins the elections in November, uncertainty will be reduced and the markets are likely to rebound, certeris paribus (as we economists are so fond of saying).

Ernie Goss