by DTI’S John Tatum
Let’s first draw somewhat of an in depth analogy before jumping to conclusions, so bear with me…
Suppose you are the chaperone of your child’s senior trip to the Bahamas. You have taken a full week off of work to enjoy this time with your child and ultimately ensure their safety one last time. The day of departure comes much too quickly but nonetheless it is here. As you pack your bags you get a call from your travel agent, “have you heard?” You immediately think the worst. She goes on to explain that all flights to your region of the States have been cancelled due to inclement weather and are expected to be grid locked for the following three days.
This is where close observation of the perspective of involved parties comes into play. As an adult you need to get back to work, plain and simple. Without your job, the Bahamas would only be a dream. Your child, et al, has already unpacked and is headed back to the beach to kick off their extended vacation. There is a classic big picture vs. small picture battle setting up that will inevitably be played out in the end, because no one has enough money to spend the rest of their life at a resort in the Bahamas.
Gridlock described herein is defined by Webster as ‘congestion or lack of movement.’ I would take that a step further and add ‘…as time continues.’ Why is this important? Just as in th analogy above, delaying the inevitable could ultimately make the situation worse, but the interim is certain to make for a good time. I am not here to argue what the outcome will or will not be, only that there is a strong possibility of some consequence or economic reaction to prior actions. Party lines are being clearly drawn and preliminary upsets are already in the works for the upcoming election, which once again makes for heated debate and relentless press coverage.
Historically speaking, the market has made some of its most historic moves in reaction to news announcements, especially when uncertainty is involved. Some would argue that if there ever were a time to be certain, it’s when one party has an overwhelming majority. Theoretically or in a vacuum this could be true. The fact remains that when this is the case, parties tend to force legislation that could otherwise under two party control, be avoided or at the very least slowed down so the market can digest and disseminate. On the flip side, in the event that political gridlock does take place in Washington, the fact remains that human emotion remains the same. Neither party will want to wor with the other, causing a tangled web of ideas that will never make it out the door. This situation leaves Wall Street with an expectation of stagnation (as opposed to stagflation). Once again, this would appear to have negative consequences.
Once Wall Street has confirmation of a balance of equal party representation, the rules are basically set, barring no unforeseen outrageous circumstances. Businesses can begin to adjust according to current rules and regulations, positioning them to make final changes to everything from accounting procedures to compliance, ultimately affecting the lower portion of the balance sheet and by default stockholders equity. Through the balance sheet, costs are largely a known factor during times of gridlock. Companies are then able to make more accurate projections and grow as close to linear as possible.
There are many schools of thought on what indicators one should follow leading up to the election. I like to keep it simple. Following news, projections, and political theory can be helpful the closer we get to November 2nd; however, the one issue I have with utilizing that information as an indicator of who will be elected is that there are generally just as many opinions in opposition to the ‘expert’ opinion. My preferred method of keeping up with possible election results is through official polls. Are they perfect? Absolutely not. They do however in many cases offer nearly an unbiased lookat odds of success for a candidate given a stated number of poll participants. Given the fact that there are “movements” taking place all over the country in both parties, this is likely to be a volatile campaign season. Following the ebb and flow of the election leading up to November 2nd will afford you insights to market direction on the evening the votes are counted.
At the end of the day fundamentals will ultimately prevail, but the numbers will tell you how the votes are cast, both at the voting booth and in the market. Follow the numbers and try to refrain from speculating on how the market will price itself. Instead, wait for the trend to reveal itself and have the ability to take advantage of it.
Each time a major election rolls around I hold a webinar for anyone interested in trading the futures markets the evening winners are announced. If you would like to join me for this event call us at 1‐800‐745‐7444 with your information.
