On paper, at least, investors should be thrilled that President Obama was re-elected last night. And savers should be bummed.
Democrats have historically been better for the stock market, according to the Stock Trader’s Almanac. When a Democrat is in the White House stocks have risen 10 percent, compared to just 6.8 percent under Republican presidents.
But you can toss those numbers out. This time the situation is not only entirely different but immensely confusing.
First, the reason for the joy on Wall Street: President Obama’s good fortune also means that Federal Reserve Chairman Ben Bernanke gets to stay on. Republican candidate Mitt Romney made it very clear that he would have shown Bernanke the door.
And when it recently looked as though Romney might win the presidency there was speculation — said to be coming from friends of Bernanke — that the Fed chairman could decide to retire no matter who won the presidency. That gossip, which lasted for a few days, sounded more like Bernanke leaving himself a graceful escape.
With Bernanke staying, Wall Street gets a continuation of his policy called Quantitative Easing, which is essentially a scheme to print money that is then used to purchase government and other securities.
QE, as it is referred to, is now in its third iteration. And while this policy hasn’t had the positive effect on the economy that Bernanke would like, all that extra currency has been keeping interest rates low. And a lot of the extra dough being printed has been seeping into the financial markets, creating what could turn out to be the next dangerous bubble. Equities.
Stock prices have remained elevated during the entirety of QE’s existence, although there has been a Law of Diminishing Returns. The third dose of QE announced this past September — which was also the most bold — didn’t produce nearly the positive reaction on Wall Street that the first two did.
Despite the returns, stock investors are probably pinching themselves this morning. Not only are they guaranteed the continuation of QE but they’ve also been handed four more years of a Democratic presidency that is supposed to be good for stocks anyway.
But Wall Street pros are prone to deceive themselves. Although QE looks to be a gentle beast, it very well could rear up and toss the US economy to the ground.
Stock futures prices declined last night when it became clearer that the President would be re-elected. At least some late-night traders understand the dangers that are connected with another four years of Obama.
One problem is that QE takes money away from savers, who are receiving next to nil on their cash nest eggs.
Without this unearned income a significant amount of the American population isn’t able to spend. And the economy is suffering because of that.
The other problem is that QE could be producing latent inflation.
If that occurs, interest rates will rise quickly and the inflation beast will come to life.
Right now, there’s cause to celebrate on Wall Street. The financial community likes to deal with problems only when it has to.