One might have anticipated that risk assets would trade sideways on the day of the election. After all, unusual levels of uncertainty tend to keep investors in a wait-n-see mode.

However, stocks immediately rocketed more that 2% out of the morning gate. And that should tell you that the election is little more than a side show.

The real issues? Federal Reserve and federal government stimulus.

To that end, my colleague Rob Charette picked up this gem in the “Twittersphere.” (See the graphic below.)

Yep… you guessed it. The stock bubble does not care who wins the presidency or Congress. The only thing that matters is stimulus.

Of course, too much stimulus has led to problems for risk assets in the recent past. When the Fed manipulated borrowing costs to 50-plus year lows in the mid 2000s, and when banks provided ridiculously easy access to rock bottom rates, it created a housing price bubble.

Today, the discrepancy between the cost to own and the cost to rent has once again widened. And by a considerable amount. At some point, people stop paying extremely high prices for the privilege of home ownership payments.

Does the decoupling in housing pose a threat to stock prices? It might. In 2007, a real estate recession precipitated the broader “Great Recession.”

Even without a banking crisis, the U.S. economy is still reeling. Take a look at the demand for fuel (e.g, gasoline, jet fuel, etc.). The current recovery has only brought us back to 1997 levels, hurting the entire energy sector.

Meanwhile, many people may have returned to restaurants. Yet dining out data show that the restaurant industry, and countless employees, are struggling to survive. (Note: My favorite childhood chain on the East Coast, “Friendly’s,” just filed for Chapter 11 bankruptcy.)

The crucial point? Fed manipulation of rates can only take stocks so far. If earned income does not make meaningful strides, the stock bubble is likely to burst.


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