Election's end may be winner for markets

Whether John McCain or Barack Obama wins the presidency, the simple fact that voters have spoken could give U.S. financial markets the momentum they need to mount a sustained rally, or at least regain some stability.

Financial turmoil and the growing likelihood of a recession are primarily to blame for investors' recent flight from stocks and embrace of safe investments and cash.

Speculation over what to expect from an Obama or McCain administration has only increased investor anxiety, says Robert Froehlich, chief investments strategist with DWS Investments, the U.S. retail brand of Deutsche Bank's global asset-management division.

Froehlich, who's based in Chicago, discusses expectations, myths and realities about the election and the markets in an interview:

Q: How do you expect U.S. markets to react after the election?

A: Once we put the uncertainty behind us, I think that's going to set the stage for some fundamental improvement in our markets for the next seven to eight weeks. I'm going to call that time frame a "relief rally."

I don't know that the market is necessarily going to go up 500 points the day after the election. But I do feel very strongly we're going to have a foundation created, where certain investors will become winners and certain industries will become losers.

What's more important, I think investors have been sitting on the sidelines, saying, "I just can't get into the market, there's too much going on, and we don't even know who the next president will be."

Once we remove that major uncertainty, I think that we're going to see that as a catalyst.

Some people may get in the very next day. With other people, it make take until early December. But I'm looking for a strong fourth quarter.

Q: What happens if there's another cliffhanger election, like in 2000, and results are contested?

A: It would be the worst scenario that could happen. Investors hate uncertainty. It's tough to quantify risk and it's tough to figure out what you want to do.

With everything we've got going on — trying to fix the financial system, trying to fix the economy — if we throw on top of that another election where we don't know who the next president is going to be, I just think you could potentially see a huge sell-off in the market.

Q: Is the next president more likely to influence markets than past presidents?

A: Yes. I believe if we look back over the last 15 to 20 years, what we've seen is the markets and public policy becoming more intertwined. We focus so much on spending patterns in Washington, on free trade and tariffs, and on what the Federal Reserve is doing.

Not only are markets around the world more connected, but individual domestic markets are now so greatly intertwined within the political process. And the person who sits at the top has one very, very powerful weapon, and that's called the bully pulpit.

Just by having an issue on their agenda, I firmly believe a president can make some industries do better, or some industries do worse.

Q: Obama is ahead of McCain in most polls. Have markets already priced into stocks the gains and losses that certain sectors can expect if Obama wins?

A: I don't think an Obama victory has been priced into any stocks.

When you look at politics, it's kind of unique. I don't think there's the same dynam

ics you have when everyone is saying, "The Fed is going to lower rates at their next meeting, and it's priced into the market."

In this case, people hold onto their candidate to the bitter end and they gravitate to whatever poll makes their candidate look best.

So I don't think you're seeing what's going on in the polls reflected in the overall market.

Q: If markets rally or tank after the election, how much of those shifts may be the result of the election, versus other factors?

A: That's the $64,000 question that no one is ever able to answer.

If you look at certain industries, and if they move more than the overall market, I would make the case that those differences would be the proof that the election had an impact on that sector.

But it's going to be very difficult to prove the psychology behind a market movement.

Q: What are some common myths about the relationship between presidential elections and markets?

A: A lot of people say to me, "Wall Street is in bed with the Republican Party, and always roots for the Republicans."

But when you peel back the onion, and look at stock market performance, the market has actually been up more under Democratic administrations than under Republican administrations.

Another thing that makes election dynamics complicated is that we tend to look at the presidential election in isolation.

But it gets so complicated, because what that president can do and can't do is going to be determined by who is going to control the Senate and the House, and then the interplay in those branches of government.