In recent weeks, the financial markets were torn over the different possible scenarios surrounding the outcome of the US Presidential elections.

Many assumed that, like last time, the outcome would not be known for weeks and when that uncertainty was lifted, it resulted in some profit taking in the bond market. The relatively quick outcome, with President George W. Bush elected for a second term, has seen the markets behave much as everyone had expected.

Given the President's pro-business policies, the stock market, not surprisingly, has rallied sharply higher. On the other hand, the bond market and the dollar, which ended the week at a new record low against the euro, struggled. This is because of the widely held belief that Mr. Bush, given his mantra of tax relief, will be more complacent than John Kerry about the widening budget deficit.

Investors should not forget however that the executive branch of the US government is just one of many factors that effect the direction of the financial markets. Looking at the equity market, while it is true that the Republican victory would seem to favour certain sectors, the pharmaceutical, energy and defence sectors immediately come to mind for example, history shows that this is not necessarily the case. Richard Bernstein, Merrill Lynch's Chief Quantitative Strategist, points out that since 1980, among the best performing sectors of the market under Republican administrations are the auto parts, retail, textile and waste management sectors. Mr. Bernstein also makes the point that consumer stocks actually tend to outperform industrials too, as was the case in Mr. Bush's first term in office.

Similarly, most people are surprised to learn that overall equity returns a better and certainly less volatile under Democratic administrations. The opposite is true for the bond market, although as Tom Sowanick, the Head of Wealth Management Strategy at Merrill Lynch, points out, over a four-year term, both stocks and bonds tend to show positive returns regardless of the party in charge.

In the long run, economic fundamentals are what matter most. The bond market suffered its biggest drop since July on Friday following the stronger than expected US jobs data. While political uncertainty was a factor, the bond market's recent strong performance was more of a reflection of the growing uncertainty about the sustainability of global expansion, particularly in the face of higher oil prices.

Speculation of higher US interest rates peaked in June and while some economists are now predicting the possibility of a recession next year, any reversion back to above trend growth would put more pressure on the bond market. Although higher oil prices have not had a material effect on inflation yet, price stability is what will mainly dictate the direction of bond yields.

The stock market is a slightly different story. Valuations remain quite attractive, but the market has struggled this year, despite strong earnings. Higher input prices and the lack of pricing power suggests that corporate profitability will likely to decline going forward, so investors are going to have to be even more nimble.

All of this of course is not meant to overly discount Mr. Bush's influence on the financial markets. During his second term, given chairman Alan Greenspan's advanced years, President Bush will have to nominate a new head of the Federal Reserve. Mr. Greenspan's current term expires in 2006 and replacing the eminent chairman will be a tall order. But even here, there are unlikely to be any real surprises.

Mr. Bush is likely to put partisan politics aside. He is expected to move quickly and decisively so that any potential nominee causes the minimal uneasiness and disruption in the financial markets as the Greenspan era comes to a close.

The most significant effect may come in the form of regulatory reform. Mr. Bush had been quite candid about his intention to reform Social Security for example. Nevertheless, given how politically the whole subject is, how far he will be able to go in terms of privatising it remains to be seen.

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Kees van Beelen is a portfolio manager at the Bank of Bermuda, a wholly owned subsidiary of HSBC. The views expressed here are his and not necessarily the bank's.