Why Wall Street Is Worried About Mitt Romney

His "pro business" policies might harm the economy in the short run.

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Republican presidential candidate and former Massachusetts Gov. Mitt Romney speaks at the 67th annual Alfred E. Smith Memorial Foundation Dinner, a charity gala organized by the Archdiocese of New York and also attended by President Barack Obama,Thursday, Oct. 18, 2012, at the Waldorf Astoria hotel in New York.

They're tired of being called fat-cat bankers and getting saddled with the blame for the nation's economic woes. So after backing President Barack Obama in 2008, many Wall Street honchos now want to see Republican challenger Mitt Romney claim the White House.

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But they're starting to have buyer's remorse even before the deal has been closed. While Romney routinely touts his business acumen as an asset that will help stimulate hiring and revitalize the U.S. economy, his policies could cause an unexpected pullback if Romney wins and they go into effect. So as economists crunch the numbers, investors are girding for a bear market in stocks and a slowing economy should Romney win.

The Economic Outlook Group of Princeton, for example, has run simulations gauging the impact of both a Romney and an Obama victory. Here's a comparison of how the economy might fare if each candidate's policies go into effect:

Scenario 1: Obama wins reelection and Congress remains divided between Republicans in the House and Democrats in the Senate:

  • GDP growth in 2013: 3.2 percent
  • Unemployment rate at end of 2013: 7.3 percent
  • Net gain in jobs: 2.5 million
  • U.S. budget deficit: $850 billion
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    Scenario 2: Romney wins and Republicans take over both houses of Congress:

    • GDP growth: 2.0 percent
    • Unemployment rate at end of 2013: 7.9 percent
    • Net gain in jobs: 1.5 million
    • Budget deficit: $925 billion
    • Many investing firms are searching for money-making opportunities if there's changeover in Washington that triggers turbulence in financial markets—with an Obama win presenting at least as much opportunity as a Romney victory. UBS, for instance, recently advised clients that an Obama win could produce a bull market if he moderated some policies and struck a budget-cutting deal with Congressional Republicans, which would reduce worries about political gridlock strangling the economy.

      Obama's policies aren't necessarily better, though. They're simply less radical than some of the things Romney has proposed, and therefore less likely to generate uncertainty over policies that would require big changes. Obama also has also been less aggressive than Romney when it comes to tackling tough budget problems like the rapidly rising cost of Medicare, which some president is going to have to tackle sooner or later.

      [READ: See How the Election Might Affect the Stock Market]

      Romney's policies are more of a wild card because of the major changes he's seeking. He wants to cut all income tax rates by 20 percent, for example, and offset the lost tax revenue by slashing government spending by hundreds of billions of dollars. That's why unemployment, theoretically, would go up during the first year of a Romney presidency, while economic growth would slow: The cutbacks in government spending he favors would be large enough to drag down the broader economy.

      Romney, of course, claims that his plan to slash taxes and reduce the deficit would eventually make the economy stronger. Maybe so, but it would first cause economic withdrawal symptoms, which is what's showing up now in computer simulations. Forecasting the stimulative effects Romney's policies might have down the road is a lot harder, which is why the Romney campaign has been bickering with nonpartisan groups such as the Tax Policy Center and others who say that his fiscal math doesn't add up.

      Obama has also proposed some changes that would lower economic growth, such as raising taxes on the wealthy. So his plan isn't optimal, either, if maximizing growth in 2013 is the main goal. "Both the Obama and Romney simulations produce a weaker economy over the next four years, compared with our baseline forecast," IHS Global Insight told clients recently.

      Another concern is the fate of Federal Reserve Chairman Ben Bernanke, whose second term expires in January 2014. Romney has said he'd appoint somebody else who favors a tighter monetary policy, with higher interest rates and fewer efforts to stimulate the economy through risky moves such as quantitative easing. But Wall Street has grown comfortable with Bernanke's loose-money policies, since they tend to boost stock prices and improve the profitability of trading firms. So stocks could swoon if the Fed suddenly changed its policy.

      Whoever wins probably won't be able to push his unadulterated plan through Congress, anyway. "The newly elected president will have to work with Congress to foster compromise, a task that will likely prove difficult over the next four years, especially if the election result is close, which seems likely," IHS advises. So Wall Street may have less to worry about than it realizes.

      Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.