The presidential election is over—finally! A million campaign ads have run and $6 billion was spent—all to reelect President Obama and keep the House of Representatives under Republican control and the Senate in Democratic hands. Who can possibly think it was worth it?
But right now I want to address what’s next for investors—not traders, not stock pickers trying to “play” post-election trends, but the rest of us who have most of our money in funds and exchange traded funds (ETFs) and occasionally adjust our portfolios in response to market moves.
I think the election’s results raises three big concerns:
- continued gridlock in Washington
- perpetuation of the easy-money regime at the Federal Reserve
- and a possible international crisis involving Israel and Iran early next year
“I think this election is...probably going to intensify the gridlock and dysfunction,” Greg Valliere, chief political strategist at Potomac Research Group, told me.
Valliere has been observing Washington, DC for three decades at the nexus of politics and finance—a hot ticket in today’s macro-driven markets. I’ve interviewed him several times, and usually he believes that things will work out. But not now.
“I would say there’s no agreement on major issues. The House is not going to be able to make a deal. They haven’t been able to make a deal,” he told me.
Valliere is referring, of course, to last year’s horrendous negotiations over the debt ceiling, described in painful detail in Bob Woodward’s new book, The Price of Politics.
Republicans were deeply divided over whether to accept any revenue increases as part of a “grand bargain” to raise the debt ceiling discussed by President Obama and House Speaker John Boehner. And the president, according to Woodward, fumbled the ball on the goal line in the negotiations’ final stages.
But with a status quo election, what’s going to change things?
Maybe the “fiscal cliff,” when the Bush-era tax cuts and payroll tax cut expire and mandatory spending reductions kick in, potentially causing a $600 billion hit to the economy at the end of the year.
- Read Howard’s analysis of how investors should handle the fiscal cliff at MoneyShow.com.
Before the election, President Obama talked about reviving the “grand bargain” talks, but the Republican victory in the House may make that less likely.
“With this vote, the American people have also made clear that there is no mandate for raising tax rates,” Boehner said Tuesday night.
“I think they will kick the can,” said Valliere, meaning Congress and the president will extend most of the tax cuts and delay the spending cuts until, say, March 31, while negotiations proceed.
“The good news is, it’s unlikely we’ll fall off a fiscal cliff in January. The bad news is this could drag on for many months,” he continued.
Just what investors need—more uncertainty.
NEXT: The Fed and Iran