The Markets
Special
Post-Election Analysis
With the election behind us, what’s next for the economy and
the financial markets? In this special analysis, we’ll take a look at what the
election means, how the markets are reacting, and where we go from here.
What the Election Means
For starters, the political makeup of the country hasn’t
changed much. President Obama remains in the White House, the Democrats are
still in charge of the Senate, and the Republicans retain the House. With no
significant change in the balance of power, both parties will have to find ways
to compromise in order to keep the country moving forward and to avoid the
economy falling off the looming fiscal cliff.
Economically, our politicians need to tackle two major
issues – the fiscal cliff and unemployment.
The fiscal cliff is perhaps the biggest and most immediate of
the two. As a result of previous legislation, deep, automatic federal spending
cuts and tax increases will take place in January unless the President and
Congress agree to some alternative plan. If they fail to reach an agreement,
going over the cliff, “would not only risk another recession, but would
intensify anxiety about the dysfunction of the U.S. political system,” according
to The Wall Street Journal.
On a related note, our ever-growing national debt is deeply
entwined with the fiscal cliff issue. If Washington can effectively solve the
cliff issue, it might also put the deficit on a path to sustainability – and
that could be great news for the economy and the markets.
The second issue is unemployment and it is deeply entwined
with economic growth. While the unemployment rate has come down, it’s still too
high as, “roughly 3.6 million Americans have been without work for a year or
more and are still looking,” according to The
Wall Street Journal. Government policies and regulations have a major
impact on corporate America’s desire to hire and expand. If our leaders can
enact pro-economic growth policies, it might encourage businesses to reinvest
and hire more people.
Here are several other things to keep in mind as a result of
the election:
·
Health
care overhaul. Love it or loathe it, it’s here to
stay. Among other things, companies with 50 or more full-time equivalent employees
will be required starting in 2014 to provide health-insurance benefits or pay a
penalty. While small businesses may not be happy about that, at least they can
now plan for it.
·
Tax
increases. President Obama has said he’d like
to see taxes rise for couples earning more than $250,000 a year. Also, tax
rates on dividends and capital gains may rise. Of course, these won’t happen
unless Congress passes them.
·
Tax
breaks. Both sides seem to agree that
certain tax breaks and loopholes will have to go as part of any compromise. And,
while this might avoid raising tax rates,
it would mean a tax increase for
those affected.
·
Entitlement
reform. Any “grand bargain” on the deficit
will likely mean changes to Social Security and Medicare. In other words, we
could see Democrats agreeing to reductions in benefits in exchange for
Republicans agreeing to tax increases or closing tax loopholes.
·
Easy
money. With the President’s reelection, Federal Reserve policy is
likely to remain “easy.” This could mean more rounds of quantitative easing and
continued low interest rates.
The economic issues facing our country are serious and the
folks in Washington know it. They also realize it will take compromise to get
things done. As CNN said, “Both sides agree the best outcome would be a broad
deal addressing the overall need for deficit reduction, including reforms to
the tax system and entitlement programs such as Social Security, Medicare, and
Medicaid.” Let’s hope our politicians put politics aside and do what’s best for
our country to get us growing strongly on the road to economic prosperity.
How the Markets Are Reacting
With the polls showing the President in the lead going into
Election Day, the financial markets shouldn’t have been surprised when he won –
but it appears they were. U.S. stocks dropped 3.6 percent in the two days after
the election before finishing slightly higher on Friday, according to data from
Yahoo! Finance.
Looking at history, it’s interesting to note that the stock
market performed quite well during President Obama’s first term. The S&P
500 index rose 76 percent from inauguration day to last week’s Election Day. By
contrast, it declined 13 percent during George W. Bush’s first term, rose 60
percent during Bill Clinton’s first term, and rose 25 percent during Ronald
Reagan’s first term, according to MarketWatch. How much of those returns can be
attributed to each President’s policies is anybody’s guess, so it’s hard to draw
solid conclusions from them.
In terms of sectors to monitor, MarketWatch says the following
might benefit from the election results:
·
Healthcare.
Drug companies and insurers might benefit from the healthcare mandate as
coverage expands over time.
·
Home
construction and real estate. Continued quantitative easing and
low interest rates may bode well for the housing market. This could be very
beneficial for the economy as housing plays a significant role in economic
growth.
·
Precious
metals. Gold prices rose last week as
investors think continued quantitative easing could be bullish for the shiny
metal.
Where We Go From Here
Putting the election behind us has removed one hurdle to
moving the country forward. With campaigning out of the way, Washington can get
back to work.
As Congress and the President engage in posturing and
gamesmanship over the fiscal cliff and the tax and entitlement reform issues,
be prepared for volatile stock prices over the next couple months. Ironically,
politicians may not take decisive action on these issues until forced to
through the pressure of lower stock prices.
Aside from the pressing issues, is there a reason for optimism
on the economy? Yes. According to Bloomberg, “The median prediction of 37
economists surveyed by Blue Chip Economic Indicators is that during the next
four years, economic growth will gather momentum as jobless people return to
work and unused machinery is put back into service.” Bloomberg also pointed out
the following positive indicators:
·
Banks have strengthened their
balance sheets.
·
Most households, which borrowed too
much during the housing bubble, have pared their debt back to normal levels
through a combination of frugality and default.
·
Upper-income households’ balance
sheets are in good shape, although mortgage debt remains a heavy burden at
lower-income levels, says Mark Zandi, chief economist of forecaster Moody’s
Analytics as quoted by Bloomberg.
·
Housing prices have gone from
falling to rising, buoying confidence.
·
Increased consumer spending should
induce more business investment in a virtuous circle.
·
There’s pent-up demand for residential
and commercial construction.
Stepping outside the U.S., we still have major economic and
budget issues in Europe, China is going through a once in a decade leadership
change while its economy slows down, and the Middle East, as always, is a wildcard.
As you can see, we have a lot on our plate to monitor! And,
as your advisor, we’re doing our best to keep you well positioned to benefit no
matter what Washington throws at us.
Weekly Focus – A Salute to Our Veterans
As we honor our
Veterans, we’d like to share an excerpt from the President’s Veterans Day
Proclamation:
“Whether they
fought in Salerno or Samarra, Heartbreak Ridge or Helmand, Khe Sanh or the
Korengal, our veterans are part of an unbroken chain of men and women who have
served our country with honor and distinction. On Veterans Day, we show them
our deepest thanks. Their sacrifices have helped secure more than two centuries
of American progress, and their legacy affirms that no matter what confronts us
or what trials we face, there is no challenge we cannot overcome, and our best
days are still ahead.”
Thank you to all
who are serving, who have served, and to the families and friends supporting
our Veterans. We truly appreciate all you do for our country.
