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
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.
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