[dropcap]M[/dropcap]arkets took a breather during a slow holiday week. Stocks declined modestly, mostly on the heels of a disappointing jobs report released Friday. Treasuries rose on the same news. The ECB cut its main lending rate by 0.25% to 0.75%, but made no mention of additional stimulus such as new bond purchases or bank lending. The Euro dropped against the Dollar. Gold and oil were little changed.
S&P 500: 1,355 (-0.5%)
MSCI EAFE: (-1.1%)
US 10 Year Treasury Yield: 1.55% (-0.11%)
Gold: $1,583 (+1.0%)
USD/EUR: $1.230 (-2.8%)
- Monday – The Institute for Supply Management’s US manufacturing index for June fell to 49.7, worse than expected.
- Wednesday – Orders for US factory goods rose 0.7% in May, ahead of expectations.
- Thursday – The ECB cut its main lending rate by 0.25%, but did not announce any additional stimulus measures.
- Friday – Labor Department figures showed payrolls rose by 80,000 in June, less than expected.
In early spring, with unemployment dropping steadily, we suggested it would take a big mistake by Obama to lose the election. It is tough to beat an incumbent even when things are bad, and it is extremely difficult when things are good or improving. Since then, however, momentum in the job market has stalled and unemployment is stuck at an elevated 8.2%.
The US stock market is up solidly for the year and is about 50% higher since Obama took office. These are not the kind of numbers that lose elections. Things will have to get worse for Romney to have a fighting chance. The housing market seems to have enough momentum to keep the US economy on a growth trajectory if there are no outside shocks. Therefore, the US election will in some ways be decided in Europe.
Greece is set to run out of money yet again in the coming weeks, and Spain’s banks remain vulnerable. Ultimately, bolder steps must be taken or the Eurozone will probably collapse, causing significant disruption and deep recession there. The impact would most certainly be felt in the US.
There are three likely scenarios which are good for Obama; status quo, a bold European integration (that capital markets like), or a market crisis which begins in late October. Voters usually rally behind the President in the beginning of a crisis, and Obama has already begun laying groundwork to deflect blame. For Romney, there is only one likely favorable scenario – worsening European crisis starting in late summer.
Bottom line: Obama remains most likely to be in the White House for another four years, but the election has become more interesting. We don’t have strong reason to believe equity markets would perform particularly better or worse under either candidate.