Stock markets could stabilize after election

updated 5:17 p.m. ET Nov. 3, 2008

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-harbor 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 with The Associated Press:

Q: How do you expect U.S. markets to react once the election is over?

A: Once we put the uncertainty of the election 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.

But, 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 possibly happen. Investors hate uncertainty. It's tough to quantify risk, and it's tough to figure out what you want to do.

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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 that 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.

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