Drucker: A post mortem of the US election

Vanessa Drucker 160 byline

Don’t just blame Obama and the Democrats for the markets’ chute this past week. Those who were still awake during the small hours last Wednesday, after Romney had conceded defeat, would have noticed that futures traded essentially flat all night. In fact, S&P futures were up 0.8 per cent at 9.38 GMT. Perhaps traders at that hour were even reflecting on the probability of continued easy money policies, and further QE, to be sustained by Bernanke or his successor under a continued Obama administration.

It was only next morning that German manufacturing numbers provided a sobering message. Then the American indexes tumbled in earnest. (Data revealed that German output had slid by 1.8 per cent in September, the steepest fall since April, in a warning that the eurozone woes were finally spreading there.) Moreover, by week’s end, a glance at the comparative performances of American and German markets shows the latter behaved far worse.

A peek inside the American indexes is, however, instructive. The financial sector really took it on the chin, losing about half a percentage more than the S&P. Obama’s victory points to stricter scrutiny of the industry and tighter regulation, coupled with the ascendancy of Elizabeth Warren, who won the Senate seat in Massachusetts. Warren, who has been a longtime vocal critic of Wall Street excesses, stands likely to achieve an influential position on the Senate Banking Committee, where she will advocate stringent interpretation of banking rules. Dodd-Frank legislation, which overhauled the financial industry, is now destined to survive another cycle, with curbs like the Volcker rule intact. Not surprisingly, JP Morgan’s Jamie Dimon and his Wall Street CEO brethren are not celebrating.

To be fair, once the reality of the Republican defeat sank in, traders did accelerate the market rout, as tides of so-called smart money unwound their pro-Romney bets. It is mystifying how financial professionals believed their own wishful thinking up to the last moment, insisting the race would be close. For those who read this blog six week ago, we predicted all along that Obama would win comfortably. One only needed to look at the polls for the electoral college, and count.

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City. She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.