This Tuesday marked the end of the 2012 Presidential Election campaign, with Barack Obama heading back to the White House. In a campaign marked by elements of vitriol and an astronomical amount of money spent, most experts ballpark it around $6 billion in total, the results were status quo. Republicans maintained their majority in the House, while the Democrats, after picking up a few surprise seats, remain in control of the Senate and Presidency.
As the new(ish) regime begins to game-plan for the next four years, a number of issues to address lay in wait. The first, and potentially most significant, is the fiscal cliff the government must face before January 1, 2013. With the Bush-era tax cuts expiring in conjunction with spending cuts, the U.S. economy will see about a 4% drag on GDP, forcing policymakers to address the looming recession. The most likely scenario is an extension of most of the provisions already in place, which would result in a drag on GDP closer to 1%.
A key proponent in all of this is a compromise of tax increases on high-income earners—a significant area of compromise for President Obama. It would seem that the majority of investors are anticipating such a short-term deal to take place, but if no deal is signed before the end of the year, the market will react to the disappointment.
Next on tap for the President is a defined, long-term fiscal package. And while it will be a difficult task with a split government, it has been done before. It is important for investors to have a roadmap to address our fiscal issues as it would reduce uncertainties, provide businesses and consumers with a higher level of confidence, and ultimately spend and contribute to positive growth. One strong point here is our high demand for U.S. Treasuries, even at current low rates.
With possible changes facing the Federal Reserve and tax increases, we are faced with a number of uncertainties. We’ve crossed the election off our list of concerns and now turn our heads to the fiscal cliff. So as we head into year end, we will prepare for market volatility while keeping a close eye on what Congress is planning.