The elections are finally over after many months of the most expensive, partisan political campaigning in history. After spending over $5 Billion we are right back to where we were the day before the election with President Obama, Democratic controlled Senate and Republican controlled House of Representatives. The market sell off the day after the election was likely due to the fact that Washington gridlock did not get any fundamental change from the elections. However, it is our opinion that things may actually improve now that the President has his “legacy” at stake which will be determined by two things; Obamacare and the economic recovery.
The other big change in the political process is that the impending fiscal cliff is indeed too big of a problem not to get a bipartisan bill passed to address the impending $600 billion impact on the U.S. economy at a time where the recovery is fragile. As the article below explains, Republicans are likely to finally give in and allow some level of tax increases along with their focus on spending cuts to get the job done. We are reading that the current debate has already moved from increasing income tax rates on income above $250,000 to over $500,000. The capital gains and dividend tax rates will also be debated but we think it is likely any changes will be more moderate than what would occur if they simply let the Bush tax cuts expire.
This is likely to be much like the debt ceiling debate where the media coverage and political posturing created an illusion of impending doom and the real result was that even though there was a downgrade of the U.S. debt rating, Treasury bonds actually went up in price. Similarly, we anticipate a great deal of noise about the impending disaster of the fiscal cliff along with some more political posturing that caters to their voters. However, in the end they will, at a minimum, kick the can down the road for six or twelve months. The real answer to our deficit issues is a combination of economic growth initiatives, some revenue increase thru the tax system and serious cuts in government spending.
We will be monitoring the fiscal cliff negotiations in Washington as well as the other issues in Europe and China to determine if any significant changes are needed in our portfolios.