US Election and Financial Markets

In financial terms there can be little doubt that the year of 2008 will be remembered as somewhere between a total disaster and a train crash!. If you have made money from investing in shares you are either very clever, very lucky or simply not telling your colleagues the truth. Nevertheless, it is an event will not forget for many years to come.

In my previous articles I have mentioned the importance of the US bail out on the wider economy and that such a process is now being repeated not only in Europe but now in Asia. Despite this reactive (but somewhat proactive) stance by many governments, this has not prevented further fiancially uncertainty. Stocks across the world have since fallen at various degrees.

Nevertheless, as numerous financial commentators have indicated this bail out action has pumped cash into the short-term credit markets to provide much needed liquidity. Furthermore, many governments in Europe and the US and even Australia have announced Government guarantees for bank depsits. This latter action, promoted to provide some security for bank deposits, has inadvertently led to many people withdrawing funds out of many unprotected investments to the banks. This has led to the freezing of investment funds. Investing seems to be a tough game at the moment. Even some of the best peforming funds over the past 12 months have been frozen.

It is difficult to accurately estimate or even guess whether the market will rise or fall within the next day of trade. I regularly research the business sections of the print media as well as watch numerous financial market updates on television and it seems every time that someone hints at a rally, the next day the same commentator is reporting a fall.

The current worldwide financial stress will be followed by greater regulatory control and most likely tighter lending standards to reduced the likelihood a repeat of the sub prime crisis of 2007. Whilst the recent media reports has indicated that global economic growth would slow to 3% in 2009 I believe that this could be ambitious considering that we are nearing the end of 2008 and the market is very volatile. This volatility is leading to many companies reducing their capital expenditure for 2009. This will in turn lead to less expenditure and production by companies providing these goods and services.

The Importance of the US Election

Without showing my preference too easily I predict that should Barack Obama be victorous in the first week of November, then their will be a rise in confidence within both the United States and much of the western world.

Whilst Senator Obama will have a massive task in his first few months of office, I believe that his calming demeanour may transpire to re-fill some of the American self esteem. This could lead to a rise in consumer confidence that there will a ‘changing of the guard’. However, it will be a daunting task to take over the worlds’ largest economy when it is at its weakest for several decades. The choice of several key positions within an Obama or McCain administration will be a crucial decision for the new President.

Obama’s key message has been Change. Whilst this “Change” message initially focused on foreign policy issues such as the conflict in Iraq the campaign now seems to be angled towards reviving Americas economic fortunes. I suspect this Change will involve greater regulation and likely greater certainty. I suspect if Obama’s new team even announce such measures post election but pre-inauguration, a steadying but not profound effect on the markets will occur.

One interesting aspect of a new US Administration will be economic flow-on effects to the advanced Western economies or even the developing economies such as China and India which are currently experiencing a slowdown. This matter could be crucial in determining the length of the global downturn.

John McCain, whilst a strong character has tended to look a little unsure of the economic way forward I suspect this unsureness will be transpired into the market post election day. Nonetheless, McCain has a great habit of proving people wrong and if elected next week you can be safely assured that the former POW will prove many wrong in Wall Street. However, I do not think he has the calming effect of the man from Chicago.

Many investor eyes will be keenly watching the results of November 4 as well as the immediate weeks beyond the election. The new President and their economic teams will have much work to do to steady the markets and show the world the market is safe again.

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