This column originally appeared on Real Money Pro on March 9 at 11 a.m. ETNEW YORK ( Real Money) --In normal times, presidential elections are important to the economic and stock market outlook, but this is not a normal period in our financial history, as huge fiscal imbalances are the elephant in the room in most of the world's economies. So, political consequences loom even larger than normal in their influence on the markets. In the U.S., our politicians have thus far failed to unite in addressing our growing fiscal imbalances. The relationship between the Republican and Democratic parties has deteriorated in a divided and divisive setting in Washington, D.C. There is no chance of fiscal reform in 2012, and, dependent upon the election results, reform may not even be likely in 2013 or beyond. (Given the gravity of the imbalances and the need to address them (sooner than later), this would not be a market-friendly development.) In Europe, a strong commitment to stemming the debt contagion is essential in providing a foundation for future economic growth. So far, policy has contained the problems, but the situation remains fragile and the heavy lifting of austerity lies ahead. That said, based on the strength of the recent market rally, it can be argued that risk assets are paying little attention to politics in the U.S. and in Europe. This is a mistake. Investors should pay attention to the growing odds of Obama and Hollande victories in the U.S. and France, respectively, as recent trends, indications and polls suggest that these likely victors will not be risk-asset-friendly developments.
Nevertheless, it remains my baseline expectation that President Obama will defeat Governor Romney, a negative for the markets. (We should closely watch the president's approval ratings. Obama now is at 48% in the Gallup Poll. The incumbent always wins when the presidential approval rating exceeds 50%. Below 47%, the incumbent always loses. So between 47% and 50% is the grey area.) In terms of the House of Representatives, most pundits expect the Republican Party to maintain its majority. Currently, Republicans have a 25-seat majority and the consensus is that they will only lose about 10 seats. The Senate majority is currently six seats (53/47) in favor of the Democrats. The Republicans will likely win between three and five seats. If President Obama wins the election, since the vice president is a tiebreaker, the Republicans need would need four seats to gain a Senate majority. If Obama loses, the Republicans would need only three seats to regain majority.