Market Neutral

Market Neutralblog

Investment ideas for the informed adviser.

How Wall Street is voting

A look at the industries most likely to be impacted one way or another by today's election outcome

Nov 6, 2012 @ 12:01 am

By Jeffrey Kleintop

The outcome of the elections will define the political context and leadership for policies that address the looming fiscal imbalances coming to a head in early 2013. Last week, we explored the post-election environment and what it could mean for the markets and economy. This week, we will take a look at what the market is pricing in regarding the election outcome. In short, the stock market has priced in a close election compared with where it was a month ago ahead of the debates. As the race has tightened over the past month, the market has slipped lower while Republican-favored industries have outperformed Democrat-favored industries.

While there are many “man on the street” polls, what matters most to investors is what is priced in on Wall Street rather than what people are saying on Main Street. Rather than merely looking at the direction of the overall market, our “Wall Street” Election Poll analyzes the market by the industries most likely to be impacted one way or another by the election outcome and can provide insight into what the market is pricing in regarding the election.

Based upon these legislation-sensitive industries, we created two indexes early this year to help us track the market's implied forecast of the election outcome reflected in the performance of these industries. Each index was composed of an equal weighting among eight industries that combine to include over 100 large U.S. company stocks. To track what the market has priced in for the Democrats' odds of retaining the White House and Senate, we divided the Democrats index by the Republicans index. While other factors may influence the relative performance of these indexes on a daily or even weekly basis, over time, the election consequences have become paramount as investors increasingly vote with their money.

As you can see in Figure 1, an upward sloping line for much of the year (particularly after the Supreme Court upheld the Affordable Care Act in June) suggested the market was pricing in a rising likelihood of the Democrats retaining the White House and their majority in the Senate. The downward sloping line, since the time of the first debate on October 3, suggests improving prospects for the Republicans as the election nears. As the results from the election become known this week, the market may continue or reverse the industry moves tracked in our “Wall Street” Election Poll, depending on the outcome.

+ Zoom

Most polls reflect a tight race for the White House as Governor Romney's odds have improved relative to those of President Obama since the first debate. However, we can see that the likelihood that the Senate may stay in the hands of the Democrats has risen with Republicans appearing less likely to pick up the four seats necessary for control. An easier way to see this, rather than looking at many individual state polls, is to observe the pricing of the futures contracts for Democrats retaining the Senate on the online betting website As you can see in Figure 3, the odds the Democrats fare well in the Senate races have fully recovered after the debates that marked a turning point for President Obama.

+ Zoom

As we have noted in the past, the outcome of the Senate is of key importance in this election. The Republicans are very likely to retain control the House, and increasingly, it appears the Democrats may retain control of the Senate. Markets may fear another two years of a divided Congress. A Congress that can act promptly, get bills to a vote on the floor, work on them in conference between the chambers, and bring them swiftly to the president's desk would be a dramatic and welcome change to the last two years of gridlocked government. After all, Congress writes the laws. A Congress that is able to work together is critical after what happened with last year's debt ceiling debacle and debt downgrade of the United States by Standard & Poor's. This matters a lot to investors because the 2013 budget is going to have the biggest impact of any budget in decades. The fiscal headwind composed of tax increases and spending cuts already in the law is likely to result in a recession and bear market for stocks if no action is taken. Congress has important decisions to make, and the stakes are very high. The dwindling prospects for Republicans in the Senate may have limited the outperformance by Republican-favored industries in recent weeks and helped contribute to the modest pullback in the overall market.

The hard-fought election will likely be followed by more fighting in Congress, resulting in higher volatility and a potential pullback for the stock market. A mildly defensive posture may benefit investors heading into the final months of the year, as markets may provide attractive buying opportunities.

Jeffrey Kleintop is the chief market strategist for LPL Financial.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17


Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video


Wirehouse training programs are in vogue

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print