3 Big Post-Election Concerns

11/07/2012 10:58 am EST

Focus: STRATEGIES

Howard Gold

Founder & President, GoldenEgg Investing

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.

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

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The second big issue for investors is whom the president will name to replace Federal Reserve chairman Ben Bernanke, whose second term ends in January 2014.

His successor, Valliere says, will most likely be Vice Chair Janet Yellen, who shares Bernanke’s (and presumably President Obama’s) dovish inclinations on monetary policy. That means that “quantitative easing”—the Fed’s efforts to buy massive amounts of mortgage-backed securities in an effort to stimulate the economy and hiring—could be with us for some time.

And finally we may have a genuine international crisis—one I’ve been predicting for years—over Iran’s nuclear program.

Tough sanctions appear to be working, sending the Iranian currency plummeting and creating genuine hyperinflation. Iranian leaders have made some noises about restarting negotiations with the US, but that’s pretty dubious, based on historical experience. And its nuclear enrichment program keeps moving forward.

Meanwhile, Israeli Prime Minister Benjamin Netanyahu has warned repeatedly that the window of opportunity to stop Iran’s plans is closing. This week he said Israel could attack Iran’s nuclear program without American help, if need be.

And he’s forged a coalition with ultra-hard liner Avigdor Lieberman before Israeli elections next January. If the coalition emerges victorious, Netanyahu will have a strong hand going into any conflict with Iran.

The blowback from that could be pretty bad—and in the real world, not Homeland. Note that at least two of these three events—the extension of the fiscal cliff and a possible Israeli attack on Iran—may take place in the spring.

That, coincidentally, is when the sweet spot for the market in the four-year presidential cycle comes to an end. May to October of the first year of a president’s term is one of the weakest six-month periods historically, according to the Stock Trader’s Almanac.

That’s why I’d hold on for now—I expect Wall Street to celebrate the Fed’s loose money policy for a while—and maybe nibble at energy stocks or oil ETFs, like the Energy Select SPDR (XLE) or United States Oil Fund (USO) as insurance against a new Middle East war. I’d also consider buying a little, not a lot, more SPDR Gold Shares (GLD) as insurance against an overly aggressive Fed.

And I’d keep my eyes peeled for any real technical breakdowns in the market. Yes, we have status quo in Washington, but that’s no time for investors to get complacent. These people have repeatedly shown they can do a lot of damage.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold and catch more of his political and economic coverage at www.independentagenda.com.

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