The calm before the fiscal storm

AS HURRICANE Sandy hits the eastern seaboard of the US, just how much will it rock the markets? And could it be a game changer for the presidential elections – now only a week away?

According to an analyst note by the chief investment strategist of S&P Capital IQ, Sam Stovall, history says that hurricanes typically don’t trigger big market declines. “Individually, the market’s performance following major hurricanes has been uneven, as equities are more likely driven by wider-reaching global events than localised natural disasters,” says Stovall. According to his research, the S&P 500 has posted median gains of between 3 per cent and 6 per cent in one, three and six-month periods following past North American hurricanes.

Yesterday’s closure of the east coast US exchanges, which will continue today, was the first time that the US stock market has been shut because of weather conditions since 27 September 1985, when Hurricane Gloria forced all US markets to close. This is also the first time that the New York Stock Exchange has closed two days in a row since 1888.

Besides the potentially devastating effects of a storm surge and high levels of rain fall, with wind speeds predicted to hit 90mph, could the hurricane change the run of the presidential race?

There has been some speculation that the non-farm payroll report, due to be released on Friday, may be delayed. This could come in handy for Barack Obama, who has struggled to get America’s jobs market moving again, despite Federal Reserve assistance.

In the longer term, however, a shift in focus away from the imminent fiscal cliff could be more economically damaging than the storm itself. “Hurricane Sandy is hugely unwelcome in normal circumstances,” says David Buik, strategist at Cantor Index. “However, were it to influence the outcome of the election, with neither candidate able to command a majority in Congress or the Senate, it would mean that attention to the US debt mountain would not receive the positive outcome it requires.”

And the US is running out of time. The Budget Control Act of 2011 is scheduled to go into effect at midnight on 31 December. It brings in a slew of measures, including the end of the Bush-era tax cuts, the end of some business tax breaks, the end of last year’s temporary payroll tax cuts and the beginning of the taxes to finance President Obama’s health care laws. The biggest fear is that the US Treasury will struggle to handle the predicted 3.5 per cent drag on GDP that the measures will cause.

It is possible that the White House will propose a new tax cut to replace the existing payroll tax cut – designed to give Americans some breathing space in the midst of the financial crisis. The new tax cut would require congressional approval after the election. But the longer that worries about the fiscal cliff continue, the greater damage they will have to consumer and business confidence.

Whether the storm will work in Obama’s favour or against him is highly debatable. But unless the US remains committed to addressing it’s enormous deficit, the US will have an even bigger financial worry than the bill for repairing storm damage.