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Kass: More on the Business of Politics

If you can find a more thorough and more objective analysis than Silver's, show it to me -- I am open to it. But I am not interested in biased polls. Give me something that is rigorous, but objective, and independent and that lies somewhere in between of MSNBC and Fox, something between The Wall Street Journal and The New York Times and something between Peggy Noonan and Maureen Dowd in its bias.

Silver's election projections might prove wrong. We only have to wait until Tuesday night. So, for now, please hold off your objections, and if Silver does prove incorrect, I will be the first to note it on Wednesday morning.

Six Possible Election Outcomes and Probabilities

  1. A relatively comfortable Electoral College win by Obama in which the Democrats keep control of the Senate -- 40% probability (baseline expectation): The fiscal drag is about 1%-1.5%, and 2013 real GDP growth is 1%-2%. Republicans briefly oppose Democratic policy but quickly acquiesce to Democrat policy initiatives. Stocks are range-bound and have limited downside (S&P 500 1390-1400) and limited upside (S&P 500 1450-1470) over the balance of the year.
  2. A narrow Obama presidential win and the Democrats retain control of the Senate -- 15% probability: The fiscal drag is 1.5%-2% (Republicans' opposition to Democratic policy continues for a few months, but, ultimately, they acquiesce. Stocks are range-bound and have limited downside (1390-1400) and limited upside (1450-1470) over the balance of the year.
  3. A narrow Obama presidential win and the Republicans regain control of the Senate -- 10% probability: The fiscal drag is 1.5%-2.5% (as partisanship escalates), and 2013 real GDP is barely positive. Stocks have 1350-1400 downside and limited upside (1450-1470) over the balance of the year.
  4. A narrow Romney presidential win and Democrats keep control of the Senate -- 20% probability: The fiscal drag is 2%-3% (as partisanship intensifies) and 2013 real GDP is flat to negative. After an initial but brief market rally, stocks have 1350-1400 downside and limited upside (1450-1470) over the balance of the year.
  5. A narrow Romney presidential win and Republicans regain control of the Senate -- 10% probability: The fiscal drag is 1%-2%. Democrats' opposition to Republican policy continues for a while but begins to abate as time moves forward and 2013 real GDP growth is 1%-1.5%. Stocks have limited downside (1390-1400) and limited upside (1450-1470) over the balance of the year.
  6. A relatively comfortable electoral college win by Romney and Republicans regain control of the Senate -- 5% probability: The fiscal drag is about 1.0%-1.5% -- Democrats' opposition to Republican policy continues for a brief period after which they give in to the Republican agenda -- and 2013 real GDP growth is 1%-2%. Stocks will likely rally in the near term. Over the balance of the year, equities would have limited downside (1390-1400) and upside to about 1470-1500.

That said, my baseline expectation (probability of 40%) remains that Obama achieves a relatively comfortable Electoral College win and that the Democrats keep control of the Senate.

This outcome has likely been discounted in the markets.

There are five other outcomes (with in aggregate amount to a 60% probability), however, that might occur and will have various impacts on the markets. Two of these outcomes, representing a nearly one-third probability, hold an adverse market outcome as they will likely result in more partisanship and rancor between the parties.

Regardless, some combination of the earnings cliff, the political cliff and the fiscal cliff will be in attendance next Wednesday, and I want to be in cash (as the melded risk/reward is not attractive to me over the near term).

I hope I am wrong.

I hope that magically the two parties coalesce and recognize the common good, as occurred between President Obama and Governor Christie in New Jersey this week.

Unfortunately, I am not optimistic, and there is no place for hope in the investment equation.

Forecast Update

With only four days left before the election -- and 60 days left for the fiscal cliff -- below is the third-to-last updated Nov. 6 election forecast by Nate Silver from his FiveThirtyEight blog (with changes since my last post in parentheses). As has been the case over the last week, the odds favoring Obama's reelection have consistently risen:

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