The votes are in and I’d like to congratulate President Obama on his re-election.
This was a hard-fought campaign on both sides, and since we now know who will occupy the White House for the next four years and the Senate and House for the next two years, some of the uncertainty we’ve been experiencing in the stock market should finally begin to dissipate.
Many of you are wondering what the future holds for stocks and the market – and while no one knows for sure – including me, I do have a couple of themes that I think will emerge (or continue) over the next few years.
Theme #1 – Corporate Cash on balance sheets
There are trillions of dollars sitting on corporation’s balance sheets that were awaiting the outcome of the election. Many were anticipating a Romney election which would’ve brought with it likely corporate easing, but now these large multi-national companies have to do something else with the cash sitting overseas. If they repatriate it, they’ll be subject to double taxation, much like they are when they issue dividends, and at the highest corporate tax rate in the world. What I expect in the near term is an increase in company stock buy-backs, which have the immediate impact of lowering supply of that company’s corporate stock.
Immediate effect: Stocks with large cash positions might be worthy investment positions and short term winners.
Theme #2 – CNBC’s Fiscal Cliff
The producers at CNBC can’t help themselves. The phrase “Fiscal Cliff” sells heaps of advertising, so you’ll hear this over and over in the upcoming weeks. Since the House controls the country’s purse strings, and the President and the House have very different ideas on how to spend money, I expect continued gridlock up to and through the so-called “fiscal cliff.” Obviously, this will be resolved at some point, but it will provide uneasiness in the markets until it’s behind us.
Immediate effect: Lots of waves in the financial markets. Probably higher VIX (volatility) index.
Theme #2 ½ – Budgetary Issues Related to the Above
I don’t know if it will be a retaliatory-type reaction, or just purely out of ideology, but I expect the continued gridlock in Washington to impact all of the sun setting provisions that have been put in different tax-law extension bills over the last several years. For example, I think the severe defense cuts will take effect at the beginning of the year and the entitlement spending to continue.
Immediate effect: See Theme #2.
Theme #3 – Weak Dollar and Quantitative Easing
The U.S.’s credit has been downgraded twice already, and it appears headed for another downgrade as we reach our self-imposed borrowing limit of $16 trillion. Obviously, the Congress and the President will just kick that down the road a bit, but that means continued weakness of the dollar compared to other currencies worldwide. This is bad news if you’re travelling to Japan or Europe for vacation, because our weak dollar buys less Euros and Yen, but the large, multi-national companies we discussed earlier will benefit from a weak U.S. dollar since they make money in all currencies. Secondly, our fearless economic leader, Big Ben, has promised to continue to print vast amounts of dollars as long as the government continues to run deficits. Looks like Ben’s printing money for a long, long time…which could lead to inflation
Potential Headwinds
If there are any market headwinds, it will be the short-term issues relating to the pending fiscal cliff and their respective tax increases. Undoubtedly, the 3.8% tax on interest, dividends and capital gains that takes effect in 2013 will have an impact as well as the continued implementation of Obamacare. Since healthcare is mandatory for those employees who work over 30 hours per week, expect to see companies continue to reduce their workforce’s hours to 29,as the CEO of Darden Restaurants (Olive Garden, Red Lobster, etc.) has already announced.
So What Does That Mean for Me?
I think the best bet for many investors is to continue to chase yield. With bank accounts earning nearly 0% and no rate increase on the horizon, the fact that the S&P 500 averages 2.2% will provide some base level of market support over the coming years. As confidence comes back, the market should also bounce back accordingly. It’s sad, but President Obama is probably a “lame duck” president, at least over the next two years, as the House will continue to block all attempts he makes at advancing his agenda.
Ultimately, it’s more of the same. The uncertainty should be ending, the weak dollar means good things for the large multi-national companies. I know many were surprised by the outcome, but we are a country that comes together. Let’s focus on the future and not on the past.
Nice post. I think the uncertainty and lack of confidence is going to continue. Nothing really changed from prior to the election and I think we’re in for more of the same shenanigans from both of the parties.
Great points. I am sure advisers are inundated with clients this year. But time will show the impact. For me, I remain on course and I don’t need to chase yields at this time or sell anytime. Most of my approach is long-term. However, it will be (and has been) interesting to see how companies will run their operations
Intriguing post! Surprised I didn’t hear more about the fiscal cliff during the election just immediately after. I’m sure they’ll reach a deal, but will it be a long-term deal or a quick band-aid fix? Not sure, but definitely agree with your synopsis of the markets being volatile as the rest of the world watchs as well!
Cheers
Hey, another Joe! Best visit of the day to our site (no offense to everyone else).
We should have talked more about that, but because we’ve done it on our podcast, omitted it. Both OG & I expect the fiscal cliff to end in duct tape first. Because we elected the same people, it’s silly to expect much different results.
So the weak US dollar compared to the Canadian dollar really sucks. It would be fine if I was traveling to LasVegas alot or booking a cruise, but it just sucks. Why? Because all of our freelance income is US based and paid in US dollars. Over the past 12 months we have lost so much in exchange. Six years ago things would have been quite different, but not now.
As we watched the election the other night my husband googled fiscal cliff cuz I said everyone is blogging about that and I don’t really know what it is.
The review he read mentioned a double dip recession for the US for the first part of 2013, which like you said, will mean that the dollar will remain weak, right?
I wish you were wrong about the lame duck, but I don’t think you are. Still happy about the overall outcome (did you see this: http://i.imgur.com/eU7pt.jpg) though!
I expect that most of the issues will resolve in the next few months. If it doesn’t it will ultimately affect the market long term. Therefore the country hasuntil the end of the year to cure these fiscal issues.
Unrelated to the financial aspects of this post, but instead to your opening sentence: I heard a blurb on talk radio today where the host (Neal Boortz), tore into Herman Cain for congratulating Obama on his election win. He said that congratulating Obama is like congratulating a thief who just broke into your house and stole a bunch of your stuff.
When does the healthcare after 30 kick in? Isn’t it 35 currently?
Interesting take and analysis, Joe! I like it…
There will be a lot of changes over the coming years (months for that matter) and I’m very intrigued to see how things play out in 4-5 years from now. Raising the debt ceiling, printing more money, and having a poor economy aren’t ingredients that make a wonderful chocolate pie. No…it will certainly lead to tough times.
Very well said. I guess as a country we liked how everything was running because we kept it the same. I do wish Washington could work together and find a solution, like a small business would, but I’m sure that’s too much to ask for.
Nice analysis of what we will be facing because of this election. I’m certain that we are going to see an economic climate that is cautious and very aware that regulations likely will only increase, taxes will most certainly not decrease (and most likely increase), and more expenses related to health care. It should be interesting to see how it all plays out, and what individual investors do in response.
That’s an interesting analysis. Although I do enjoy following US politics (I’m Canadian), I’m less familiar with how it might affect my finances. I do think that taxes on the upper tax brackets need to increase.
On the bright side, a weak dollar makes exports more competitive in overseas markets.
Yield is good. I’ve been looking a little more at BDCs.
Have you ever read the blog FOFOA? Some interesting thoughts there… I haven’t heard much about the fiscal cliff up here in Canada, but whatever happens down south will definitely have a big impact on us as well.