Navigating the meltdown

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. ¶ Just before Election Day, Wall Street ended the calmest session in recent memory with a mixed performance Monday. The Dow Jones industrial average fell 5.18, or 0.06 percent, to 9,319.83. The Standard & Poor's 500 index fell 2.45, or 0.25 percent, to 966.30, while the Nasdaq composite index rose 5.38, or 0.31 percent, to 1,726.33. ¶ 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 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?

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 in the past?

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 [the Federal Reserve].

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.

Just by having an issue on their agenda, I firmly believe a president can make some industries do better, or some industries do worse.

A I don't think an Obama victory has been priced into any stocks.

When you look at politics, it's kind of unique. I don't think there's the same dynamics you have when everyone is saying, "The Fed is going to lower rates at their next meeting, and it's priced into the market." In this case, people hold onto their candidate to the bitter end, and gravitate to whatever poll makes their candidate look best.

So I don't think you're seeing ... the polls reflected in the overall market.

Q If markets rally or tank after the election, how much of those shifts may be the result of the election, versus other factors?

A That's the $64,000 question that no one is ever able to answer.

People whose candidate won are going to assume the whole rally is because their candidate won. But it may have more to do with easing of interest rates outside the United States, or there could be any number of factors.

Q What are some common myths about the relationship between presidential elections and markets?

A A lot of people say to me, "Wall Street is in bed with the Republican Party, and always roots for the Republicans." But when you peel back the onion, and look at stock market performance, the market has actually has been up more under Democratic administrations than under Republican administrations.

That sort of pure myth of saying, "All you need is a Republican in the White House, and the market will do well" -- that just doesn't hold water when you look into the research.

Another thing that makes election dynamics complicated is that we tend to look at the presidential election in isolation. But it gets so complicated, because what that president can do and can't do is going to be determined by who is going to control the Senate and the House, and then the interplay in those branches of government.