Down to One

Story Highlights:

• Senator Barack Obama was elected president Tuesday night. In Congress, the Democratic Party strengthened its majority in both houses, but fell short of a supermajority in the Senate.
• Investors worried about a Democratic president and Congress should consider the lessons learned in the 1994 midterms.
• A happy media might help turn the tide of public sentiment for the better.

__________________________________________________________________________________

After almost two years and a cavalcade of candidates, the 2008 presidential campaign was whittled down to one on Tuesday night.

The results offered few surprises relative to recent polls. Senator McCain did slightly better in the popular vote (losing by about 6%) than the final RealClearPolitics average (an average of many prominent polls) of +7.6%. But he fared worse in the Electoral College, which is all that counts. In Congress, the Democratic Party strengthened their majority in both houses as expected, but fell short of a supermajority in the Senate.

In the near-term for stock investors, it's less important that Senator Obama won than it is that there was no major surprise or turmoil. The stock market's strong rally over the last week at least partially discounted in Obama's victory. The market knew—betting markets very recently put an Obama victory at a 90%+ likelihood, so it was no surprise that he won. Now, one major uncertainty that has hung over the market for more than a year is removed, and that is a good thing.

Some people worry a Democratic White House and Congress will lead us down the Road to Serfdom. But one must remember that the top priority of any new president and most members of Congress is simply getting reelected. That's what politicians worry about most. And Democrats need only recall what happened when the overreaching agenda presented in the first two years of the Clinton administration led to the Republican revolution in 1994. You can bet President-elect Obama and the leaders in Congress haven't forgotten. This should serve to moderate the more radical ambitions they might have.

The best short-term outcome of this result might be that the mainstream media will tone down the strident, nothing-but-negative news coverage. The constant harping on the current administration and economy can't have helped the stock market or confidence. Maybe a happy and more hopeful media will spill over to the broader public.

We think most investors are relieved to move past the election. And whether your candidate won or lost, it's a wonderful thing to live in a country where political power passes so peacefully—stock markets benefit from this stability too.