Fear of a Mitt Romney victory is what's really rattled US investors
John Stepek Oct 25, 2012
This may sound a little controversial, particularly if you have been taking sides in the US election. But hear me out.
The latest wobbles in the US stock markets aren’t all about disappointing corporate results.
Sure, signs of a slowing global economy are unnerving investors. But results haven’t been that atrocious. And you’d have to be wilfully ignorant not to have noticed that China is slowing down by now.
No, the jitters are mainly down to one thing.
Investors in the US are suddenly scared that Mitt Romney might win the election…
A month is a very long time in politics
A month or so ago, it looked like Barack Obama had a reasonably easy ride towards reclaiming the presidency. The bookies – the only people you can have any real faith in as they’re actually putting money at stake - were all backing the incumbent to romp home with the prize.
Three televised debates later, it looks like anyone’s game. Many polls have Romney as the winner, and even the bookies are no longer as ‘long’ Obama as they were before. If you look at betting website Intrade, Obama’s odds of winning have plunged over the past month or so. He’s still the favourite, but by nowhere near as much.
Now, let me make one thing clear here in case you’re in any doubt: I have no drum to bang for either candidate. This isn’t a political statement. Quite apart from the fact that - like most British people - I can’t vote in the US election, and don’t really feel very strongly about it, neither of the candidates seems terribly impressive.
Obama has spent most of his time cheerfully pandering to Wall Street while pushing through his pet healthcare plan. He’s not unlike New Labour in that respect: keep the investment bank cash cows happy and use them to fund your expansion of the welfare state.
As for Romney, it’s hard to trust a man who can change his views so readily to fit his audience. He’s unusually adept at that, even by politicians’ standards.
So, in short, I don’t really care who wins. But Wall Street does.
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Romney: a ‘hard money’ kind of guy?
There are few definitive differences between the candidates as yet. As Julian Jessop of Capital Economics notes, neither has spelt out “a detailed manifesto.” Their policy statements so far “are of the ‘motherhood and apple pie’ variety – hard to disagree with but lacking any real substance.”
Yet, as private bank Lombard Odier points out in its latest bulletin, investors seem to have got it into their heads that Romney is a ‘hard money’ kind of guy. Or at least, he’s less of a ‘soft money’ kind of guy than Obama is. He threatened earlier this year to ditch Ben Bernanke as head of the Federal Reserve, for example.
Lombard Odier is sceptical about the ability of quantitative easing (QE) to boost the ‘real’ economy. But QE does “affect asset prices.” So if Romney wins, and somehow stops the money-printing, “that could trigger a collapse of overvalued and liquidity-addicted US equities.”
Of course, there are a lot of ‘ifs’ between now and that particular outcome. For a start, Romney has to win. Secondly, he’d have to follow through on his promise not to reappoint Bernanke in 2014, when his job is up for renewal. (Although it seems Bernanke may not even want a third term in any case). Finally, whoever took over from Bernanke would have to be “less aggressive in his monetary policy”.
None of this is all that likely. After all, Bernanke was no less of a money-printer than his predecessor Alan Greenspan. Whoever follows Bernanke is likely to follow the same methods.
But that’s not to say a change couldn’t happen.
And then there’s this infamous fiscal cliff. As Jessop notes, “The Republicans have a large majority in the House while the Democrats control the Senate. A Republican clean-sweep is possible but it is more likely that Congress will remain divided, which would limit any President’s room for manoeuvre.”
In the face of all this uncertainty, what can an investor do?
The answer’s simple. Just don’t get involved.
As we’ve noted already, the US stock market is overpriced in any case, regardless of who wins the election. So wait for a better opportunity to buy in. And in the meantime, there are other areas of the world that offer much better value.
As Lombard Odier puts it, “as long-term investors” they like cheap regions, such as Europe, “where underlying risks are priced in.” When it comes to the US, however, “downside is significant and upside is limited.” You can find out more about the specific assets we like in our recent MoneyWeek magazine cover story on ‘QE infinity’.
• This article is taken from the free investment email Money Morning.
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