If the Republicans do gain the majority then the leadership will change in the House. We could have a split Congress and I believe the tension between the two parties will be ramped up looking forward to the Presidential election in 2012.
While I can’t call the outcome of the election I can give you my best guess about what I think would happen in the markets with different outcomes. Then I will give you a twist that perhaps you have not thought about.
Scenario # 1 The Republicans gain control of the House and the Democrats retain the control of the Senate.
I think the S&P 500 would rally by as much as 100 points within a 3-week period of the election; in essence a Santa Clause year-end rally. Once the euphoria wore off I would expect the markets to focus on the tax bill, how much more all of us would pay, and the problems of jobs and housing.
Scenario # 2 The Republicans gain control of both the House and Senate.
I think the market would rally initially by 100 points, take a breather, and go up almost 150 points by year-end. The Republican control of both houses would create the feeling that the newly elected have a mandate to fix the problems and undo what has been done. I think it might well be like the time when Reagan took over from Carter and the whole tone of the country changed for the positive. We would still have problems, but we should have the resolve to fix the problems. The Bush tax cuts would be made permanent.
Scenario # 3 The Republicans get control of the House and the Democrats retain control of the Senate by one vote.
In his 19 months in office President Obama has issued 64 executive orders. By contrast, in the eight years George W Bush was in office he only issued a total of 279 executive orders. We know that the president issued an executive order to halt deep water drilling in the Gulf of Mexico and even though the court over turned the ban the administration will not lift the ban.
What if the President decides that congress can’t function, i.e. give him what he wants towards his agenda? Is it possible that for the first time in the history of the United States the executive branch of the government takes over the responsibility of the legislative branch (Congress) and uses the executive order power to get what it wants?
Is he willing to become a one term president to make the changes he wants regardless of the Congress or the wants of the people? With two years to go in his first term would the new Congress (Democrats) want to support impeachment proceedings against him for his flagrant violation of the Constitution because they see him as unelectable in 2012?
I realize that this last Scenario may seem a bit off the wall but as they say “Politics makes for strange bedfellows.” The last two months of 2010 could be very volatile in both the markets and the emotions in the country.
What if there is a Scenario #4 The Democrats retain both houses?
If that were to happen look for the market to sell off big time and we would have to look at a whole new approach to how we are investing money. If that were to happen I would expect another flash crash in the equity markets, but no quick recovery. The dollar would come under tremendous selling pressure and we could see September 2008 all over again but with one major difference; there aren’t many bullets left in the arsenal of the Fed. We could be in for serious panic. I saw what happened in October of 1987 and September 2008, and I think if Scenario #4 were to play out then November of 2010 could be very scary.
You are asking yourself how could this happen? There are two reasons; jobs and housing. The unemployment rate is close to 10% and people may be so scared that they vote to keep the Democrats in control because they are scared about what the Republicans might do to their unemployment and health care benefits. Fear is a powerful motivating force.
I hope I’m wrong. However, if I’m right, you’ll know were you heard it first.
Don’t forget to exercise your responsibility to vote