This doesn’t necessarily seem likely, but the latest turns and twists of the global economy open up a scenario whereby markets could get really ugly between now and the election.
Basically, we present a plausible scenario in which things get bad on two fronts. The scenario is based on developments over the last several days.
Here’s how it could go:
First, Europe really stalls out.
Thanks to the political crisis in Spain, suddenly it’s not clear if the ECB’s powerful bond buying program will ever get off the ground.
Remember, the ECB has announced a plan to backstop government bonds, but it needs the countries to request aid and submit to outside fiscal supervision. Because of mass protests, and a burgeoning secession movement in Catalonia, Spanish PM Mariano Rajoy is very reluctant to ask for a bailout unless it’s absolutely necessary. He’d like to delay the request as long as possible.
In addition, you have heightening squabbles over what will be done with Greece (raising the specter that it will leave the Eurozone). There are more and more reports about HUGE holds in the government’s budget, and the various creditor parties are fighting about who will take the hit. The specter of Greece leaving the Eurozone is rising.
This could then start hitting markets in the US. Actually that already seems to be happening. The market’s dropping. And now we no longer have an implied “put” from the Fed, since it’s already blown its wad (or so it seems) with the announcement of open-ended QE.
Already, the market has been weak since QE3 was announced, and in particular, the oil & gas/basic materials stocks that people associate with reflation have been weak.
Those two sectors, which are supposed to rise on successful reflation, make up 2 out of 3 of the worst performing S&P sectors today.
This could be a nothing blip, but a series of weeks like this one (riots in Europe, which inevitably remind people about government debt) and markets in the US reacting badly could be the “October Surprise” that Romney needs to win.