It is no secret that the elections are Tuesday, November 2, and it is no secret that the FOMC under Ben Bernanke will begin the November FOMC starting November 2 and a decision due around 2:15 PM EST on November 3.  We have taken a look at stocks, bonds, oil, and gold as mere go-to indicators to see what can come from the election and from the FOMC’s highly awaited quantitative easing measures (A.K.A. ‘QE2’).  It is impossible to say that everything is price in at any given point in time.  This also does mean that a major sell-off will come, but for now it seems as though all of the great news expected is largely price in.

We tracked the DJIA, S&P500, NASDAQ 100, Bonds, Oil, and Gold…. Most of these are being tracked via key ETF products of SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ (NASDAQ: QQQQ), United States Oil (NYSE: USO), and SPDR Gold Shares (NYSE: GLD).  In bonds, we used the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) iShares Barclays 20+ Year Treas Bond (NYSE: TLT) as liquid instruments to track the long-term bond market.

You already know that stocks and commodities rose in September and then again in October.  Historically that is a great measure and the market returns were some of the best seen in years on a relative basis.  Maybe the returns were not the same as companies selling iAnything.  Still, the returns were very impressive.

What is priced in depends upon whom you ask.  As far as the elections, it is priced in that the Democrats will likely lose the majority of the House of Representatives but not the Senate.  In short, gridlock is the consensus. If the market knows this or is factoring it in, then the (highly debated) efficient market theory would indicate that the market has priced it in.

As far as QE2, there is still some debate out there over just what quantitative easing will look like.  There is also a debate over its outcome.  The FOMC has no room to cut rates on the Fed Funds.   Last week there was a TIPS inflation adjusted T-Note auction that actually has a negative yield due to the calculations.  What is likely is that the Fed will increase the government balance sheet again by buying longer-dated Treasuries and maybe by buying mortgages or other debt instruments.  For argument sake, just assume it is Treasuries.  The goal is print money and then turn around and spend it to buy down the longer-end of the maturity curve to send yields lower.

In theory, stocks should reflect this as well if it is all really known.  Nearly gone is the debate over the double dip recession.  Gold is the new currency as it seems that major governments are in a race to devalue the currency values to drive up exports.  Oil runs often inversely with currencies, and the old inverse relation between stock market prices and oil prices is no longer.

Bonds saw a wild swing.  At the end of August, the Long-Bond yield was challenging 3.50% for the 30-Year.  That yield is now more than 4.0%.  The new anticipation is that QE2 will be present but will be sporadic and measured through time rather than all at once or all in a short period of time.  It almost sounds like a stock buyback now at this point.  Now Bill Gross has even implied that he long bull-market in bonds is over.

SPDR Dow Jones Industrial Average (NYSE: DIA) showed a return of 4.97% in September and then in October it gained by an additional 2.76%.  That shows a cumulative return of 8.28% for the two months combined.

SPDR S&P 500 (NYSE: SPY) showed a return of 5.22% in September and then in October it gained by an additional 3.38%.  That shows a cumulative return of 9.25% for the two months combined.

PowerShares QQQ (NASDAQ: QQQQ) showed a return of 9.49% in September and then in October it gained by an additional 6.47%.  That shows a cumulative return of about 16.57% for the two months combined.

United States Oil (NYSE: USO) may have tracking errors, but oil is perhaps the very first commodity that affects most of the public.  The oil ETF began to peter-out in October after a massive September and that shows a less impressive read than other tracking data.  The oil-tracking ETF showed a return of 9.14% in September and then in October it gained by an additional 0.94%.  That shows a cumulative return of almost 10.2% for the two months combined.

SPDR Gold Shares (NYSE GLD) showed a return of 4.77% in September and then in October it gained by an additional 3.68%.  That shows a cumulative return from the end of August to the end of October of 8.63% for the two months combined.

iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) tracks the price movement of the Barclays Capital U.S. 20+ Year Treasury Bond index, so as yields fall this will rise or as yields rise this one will fall in price.  This showed a negative return of -2.52% in September when the recovery looked less interrupted and in October it posted a loss of -4.47% as inflation became more apparent and as dollar terms and voracity of QE2 came lower as the economic weakness looked less and less weak.

ProShares UltraShort 20+ Year Treasury (NYSE: TBT) is the inverse and leveraged-inverse bet on the Barclays Capital 20+ Year U.S. Treasury Bond index.  Its aim is to track on an intraday basis twice the inverse move of the index.  The index returns through time will vary when it comes to the “TBT” because it is based around futures contracts with leverage and therefore with potential tracking error.  The inverse-leveraged and longer-dated treasuries ETF via the TBT showed real gains of 3.9% in September and another 8.7%  in October.

This weekend’s edition of Barron’s had a cover story of “BYE-BYE, BEAR” calling for stocks to jump about 7% or so by next June.  That might sound good on top of a rally, but in the new normal and after how fast the markets swing now it seems too low of added gains on top of what has already been seen versus the inherent price risks of equities after rallies.  Barron’s same Big Money Poll also went as far as to already predict that Obama would lose the White House in 2012.  Taking polls two years out is very much of a risk, and regardless of which side of the aisle the bulk of us are on it seems too difficult to bother pricing in data two years out.

When you see moves of this sort and the news this well telegraphed, that usually indicates that the base-case plus and minus a bit is largely priced in.  Does that mean that the same sort of after-event market reaction cannot continue? Of course not.  It just implies that newer and better events are probably more likely needed to propel shares higher.  No runs last forever.

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JON C. OGG

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