The 2012 election is over and we now know who our president will be for the next four years. We’ve received questions from clients asking what we think the market is likely to do in light of the election. While we don’t pretend to be political pundits, it appears that the balance of power in Washington has not changed: The Republicans hold the majority in the House, the Democrats hold the majority in the Senate, and President Obama will remain for another term. The stock market is likely to refocus on what kinds of policies may actually be implemented going forward. Campaign rhetoric is mostly just that – rhetoric. Now comes the reality of trying to pass specific pieces of legislation. Given a still divided Congress, that will likely entail a fair amount of compromise on both sides. The question is whether compromise is even possible considering that the people who couldn’t cut a deal last year are still in office.
The issue that demands immediate attention is the “fiscal cliff” that looms at the end of the year – that is, the combination of tax hikes and spending cuts that could really hurt the economy if they go into effect as currently planned. Now that we’re past the election, we’re sure to be bombarded by news of the inevitable wrangling over the issue. Our view is that any agreement that postpones the worst effects of the cliff would likely be a near-term positive for the markets. Notably, most analysts agree that the stock market has already discounted the notion that a compromise will be reached and the fiscal cliff discussion will be pushed into next year. That increases the risk of higher market volatility if a compromise isn’t reached and market participants are too complacent. If some sort of grand bargain was actually achieved, that could be a very bullish development over the long-term (depending on the details), though we’re not holding our breath. Additionally, significant spending cuts and revenue increases that are sure to be part of the solution may also create a short-term drag on the economy and subsequently result in increased market volatility.
Overall though, the election results don’t materially alter our generally positive view of the markets. Instead of getting caught up in the political fray, we’ll continue to focus on our process. From that standpoint, we continue to believe the economy is marginally improving, market valuation is not excessive, and technical indicators are still supportive despite the recent pullback in stocks. In addition, we’re now entering what has historically been the strongest part of the year for stocks, so we’re looking for additional gains in what has been a good year for equity investors so far.