Markets on edge for election day and beyond

Markets will likely be on edge leading up to Tuesday's election -- and volatile the day after and for the remainder of next week. Emotions about the election are high and often bitter. The trench warfare of the campaign is intense.

The polls -- and the analyses of the polls -- give the nod for a very narrow win to President Barack Obama, especially after a relatively decent jobs report on Friday. Mitt Romney's camp says he's going to be the clear winner.
We'll see. There are some hints from history on what may happen.

Obama wins
If Obama wins relatively clearly -- that is, the results aren't disputed and end up in the courts -- the stock market may well tumble on Wednesday. It did after he was elected in 2008: The Dow Jones industrials ($INDU) were off 7.1% by the end of the week, with the Standard & Poor's 500 Index ($INX) off 7.4% and the Nasdaq Composite Index ($COMPX) down 7.5%.

Yes, those are real numbers, but they may have had less to do with the president-elect than with the ongoing financial crash of 2008.

Obama and Wall Street have an edgy relationship, even though one of the great stock market rallies in history began in March 2009 after he took office. Many on Wall Street have spent millions of dollars trying to push Obama out.

There is a chance for a different outcome. If Obama wins, it means Ben Bernanke will probably stay on as chairman of the Federal Reserve Board until his term expires in 2014. And the Fed's accommodative monetary policy -- the promise of low interest rates into 2015 -- will continue.

Moreover, the odds for a solution to the fiscal cliff -- the combination of tax increases and spending cuts -- will increase. To do nothing won't help Republicans. That will be bullish for stocks.

The first scenario is more likely, but the second is worth thinking about.

Romney wins
If Romney wins the election clearly, the stock market may jump. He himself predicted it would when he made his now-famous comment about 47% of the population seeing themselves as victims.

Our conjecture here is based on the market's reaction to George W. Bush's re-election in 2004. The major indexes jumped about 3% that week.

That return was about all the Dow did for that year; the S&P 500 and Nasdaq ended the year up more than 8%.

Wall Street will be delighted in a Romney win because, the theory goes, regulation will be rolled back and Obamacare will be repealed. And there is the prospect that Romney's vows to fix the tax code will mean lower taxes for the wealthy.

It is possible -- if unlikely -- that a Romney win won't cheer the Street. One issue is Bernanke, who would be pressured by many in Congress to quit and go back to Princeton. Two issues will go through investors' minds: Who will replace Bernanke and when would a new Fed leadership then start raising interest rates? Rising rates are death to stocks.

There's a third issue. Romney is an experienced and successful business executive. But what is not clear is whether he has the political subtlety to convince a tea party-dominated Republican majority in the House of Representatives (and maybe the Senate as well) to trim government spending carefully without tipping the economy into recession. He insists he can lead, but Congress is not a business. There are lots and lots of agendas and scores to be settled publicly and privately.

The tea party scares Wall Street. Look at the reaction in the debt-extension crisis in the summer and fall of 2011. The Dow fell as much as 6.9% before stabilizing in early October; the S&P 500 and Nasdaq were off about 8%.

There is no winner
This assumes that neither Obama nor Romney can come up with 270 electoral votes needed to win. Or results are delayed by the effects of Superstorm Sandy in the Northeast or Ohio.

No one wants this except political talk-show hosts. Least of all investors. When the 2000 Bush-Gore election ended without a clear winner, the Dow fell 3.2% that week, with the S&P 500 off 4.6% and the Nasdaq off 11.3%.

Admittedly, the dot-com bust had broken the 1990s bull market, and the Sept. 11, 2001, terror attacks were ahead.

But a soft economy and a weak stock market do not do well in extreme political uncertainty. Between Election Day 2000 and the market bottom in October 2002, the Dow fell 33%.