NEW YORK (Reuters) - The twists and turns of President Obama’s policy-making are forcing many market watchers to put down their spreadsheets and turn on the TV.
Investors are getting into a new guessing game centered on the political theater in Washington, a show slated to grow more dramatic as candidates in November’s Congressional midterm elections step up activity.
As Democrats and Republicans tangle over plans to regulate the financial markets and overhaul healthcare, some fear policy-related volatility in financial markets will make U.S. assets less desirable.
William Larkin, fixed income portfolio manager for Cabot Money Management in Salem, Massachusetts with $475 million under management, said investors often try to project future events based on conditions in the present. Political uncertainty makes these projections harder.
“That environmental risk, which is the political part of it, is now a gray area. That makes trying to project out very difficult,” he said. “That means I need higher risk premium, and lower price.”
The surprises coming from the U.S. government are giving some investors pause.
“I don’t see with this volatility how as a foreign investor you can’t help but step back and look at the United States as an investment with some skepticism,” said Kenneth Naehu, a managing director and the head of fixed income at Bel Air Investment Advisors in Los Angeles, which has $5.5 billion under management.
“I think this type of volatility will cause them to be more careful,” he said.
The market’s movements following President Barack Obama’s announcement on Thursday that his administration would seek curbs on risk-taking at big banks was a case in point.
Stocks tumbled, leaving the major indexes down nearly 2 percent for the day on Thursday and another 2 percent on Friday. Volatility jumped and investors sought safety in government bonds which rallied despite the Treasury Department’s announcement of $118 billion worth of fresh supply next week.
“It’s really kicked off with the election in Massachusetts,” said Michael Pond, a Treasury and inflation-linked strategist at Barclays Capital.
The victory by Republican Scott Brown over Democrat Martha Coakley in a Senate election to fill the seat of late Sen. Ted Kennedy — long considered safe for Democrats — translated into direct market activity, Pond said, as investors speculated about its impact on healthcare reform and government spending.
The midterm Congressional elections slated for November could ignite more battles around the country.
“They’re going to be ugly, because of the Massachusetts election,” Larkin said.
But midterm races won’t be the only political fireworks to watch for. In addition to President Obama’s vow on Thursday to limit bank size and prevent some forms of proprietary trading, there has been growing uncertainty over whether the Senate will vote to confirm Federal Reserve Chairman Ben Bernanke for a second term, as well as fresh talk of an overhaul of Fannie Mae and Freddie Mac, including curbs on their executives’ compensation.
The recent upheaval follows a period of several months during which markets had seen smooth sailing as prospects grew for an economic recovery.
“In the last week you’ve seen a pickup in volatility in the market, but that’s also coming off of a period of what would be significant market complacency,” said Lawrence Glazer, a managing partner at Mayflower Advisors in Boston.
Naehu said Democrats’ waning power added to the opacity of the overall political situation.
“When there’s one party in control that’s more of a known,” he said. “The financial markets do not like unknowns. The way the political events are transpiring there is more unknown.”
Editing by XXX