The big surprise of Tuesday’s outcome is that the estimated $6 billion spent in support of elections across the country resulted in no change in the composition of the government. We have the same president. The House is still controlled by Republicans and the Senate is still controlled by Democrats. The Republicans fell short of expectations by losing ground in the Senate.
What’s in Store for the Near-Term?
We believe Obama’s reelection means the market will view the economy as continuing to head down a path of sluggish growth in the first part of 2013.
- Businesses have delayed spending in anticipation of more clarity on taxes and government policy following the election
- But with no change in government, they may continue to delay spending until they get further clarity on policy
- At the same time, there should be little short-term impact on consumer spending because government is likely to delay implementing tax hikes at the beginning of the year in anticipation of a resolution
- Fed policy is also likely to remain unchanged for the foreseeable future.
With all this said, big down markets have a way of getting Washington’s attention, and yesterday’s drop in the Dow is likely to help spur policy makers towards some action.
With the composition of Congress unchanged, we believe it’s likely that some sort of proposal to address the fiscal cliff will be passed in the lame duck session. Even if they don’t pass anything that completely resolves the fiscal cliff, they will hopefully agree upon a temporary fix.
What about Long-Term Market Prospects?
From a valuation perspective, stocks remain very cheap relative to bonds, and we believe investors should continue to look to equities over the long term. Many U.S. companies still have strong balance sheets and are well positioned for growth. In order for that to happen, however, we need to see some resolution to the fiscal cliff. Hopefully that happens over the first six months of next year and will then clear the way for better growth in the third or fourth quarters of 2013.