Here's the simplest guide you will ever find for how to play the U.S. presidential election in the markets.
If Barack Obama wins, buy bonds. If Mitt Romney wins, buy stocks. Or so the strategy team at Barclays Capital concluded this week.
It might seem utterly irrational to sum up the investing implications of this too-close-to-call election with such clarity and simplicity; the links between politics and markets are opaque, nuanced and imprecise at the best of times. Most analyses of the potential market impact of the presidential race are thoughtful yet long-winded reports filled with on-the-one-hand, on-the-other-hand equivocation, backed by reams of less-than-convincing historical market data.
Yet it's also hard to deny that at such times of uncertain effects of non-market events, logical analysis often matters much less to the market than what investors think other investors are going to do. And this is what makes the Barclays report interesting: It's based on a survey of the firm's own clients – including hedge funds, banks and institutional asset managers – in which they were asked how they expect the markets will respond to an Obama win versus a Romney win. By extension, the survey results imply how these investors – who, collectively, manage more than $10-trillion (U.S.) in assets – are likely to act themselves in the wake of next Tuesday's vote.
More than half the respondents predict a small or "substantial" (more than 4 per cent) rise in the U.S. stock market if Mr. Romney wins. But they also think a Romney win would trigger a selloff in U.S. bonds. The idea seems to be that a Romney administration might favour a tighter monetary policy (a negative for bonds), but would provide a "more promising growth outlook" (a boon for stocks).
"They favour long equities and short bond portfolios as the best way to express a Romney win," the Barclays report said.
Conversely, more than half of respondents foresee a small to substantial equity selloff if Mr. Obama wins, while they lean toward a modest rally in bonds.
"[Mr.] Obama's victory would likely be perceived as preserving the status quo," the report said.
Do these investors really believe these rationales? It would appear not; most expect the effects to be short-lived – essentially knee-jerk responses to the election result, and the perceptions, however overstated, of what those results imply about longer-term future policy.
Still, there's a lot of money to be made and lost in knee-jerk responses, and these investors know it. If this is the market response that heavyweight investors anticipate in the days following the election, you can be sure they will be placing their own bets accordingly, even if it's only until the post-election hoopla calms down. You don't have to believe it to trade it.
David Parkinson