One piece of uncertainty is behind us, and other pieces of uncertainty now come into focus. Indeed, we know that President Obama will continue to serve our country as President for the next four years. We also know that the Senate has become more Democratic, yet not enough to avoid filibusters. You need a two-thirds majority for that. The House remains strongly Republican. In short, we wake up today with just about the same government we’ve had for the last two years. It has been gridlocked, and on many is sues, it will likely remain that way.
In the near-term, we expect that the fiscal cliff will be front and center. Because the makeup of Washington D.C. is basically unchanged, we expect a fierce debate that will likely run right up to the deadline and will end with half-measures that will allow both sides of the aisle to declare some sort of victory. We do not expect a real and durable solution, and we do not expect the debate to be terribly friendly.
At the same time, we do not think that the worst case is the most likely case. Half-measures have been the order of the day in Congress over the last two years, and we expect more of the same. Some taxes will probably go up, and some spending will probably be cut. It will probably be a minor solution that will be revisited again in a couple of years.
Tax policy will likely have the largest and most durable impact on the investment world, and we currently have little clarity on the issue. Dividends and capital gains could be taxed at a higher rate, but don’t forget that the highest rate being considered would be around where it was 10 years ago. Markets have thrived in the past under much higher tax regimes than we would face in 2013.
The Federal Reserve is more likely to remain accommodative with President Obama remaining in office, and that could be good for markets in the near term. Mitt Romney had vowed to replace Fed Chairman Bernanke, the architect of the monetary support initiatives we’ve seen since the financial crisis of 2008. If Ben Bernanke remains on as the head of our Central Bank, we believe the monetary support will remain. This should be supportive of risk assets like stocks.
As for today’s sell off, we think it is more of an election hangover than anything. There is little reason that an election calling for “more of the same” should fundamentally change the markets or the economy. We, as a country, woke up this morning and realized that not that much changed last night. Unfortunately, the issues facing us didn’t change either. Regardless of the winner, they need to be dealt with. Let the debate begin.
Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®