The votes have been cast, Mitt Romney has phoned President Obama to concede and the victor has graciously accepted the challenge of guiding the faltering US economy through the next four years.
But what does Obama’s re-election mean for world stock markets – and more particularly, for your savings and investments?
At first glance, the signs are good. The Dow Jones index moved up nearly 150 points on Election Day, markets in the Far East generally welcomed the election result and the FTSE opened up on the news. Stock markets like certainty – what they must have feared above all things was a close election that gave rise to legal challenges, meaning that a clear result wouldn’t emerge for several weeks.
But a quick glance below the election night euphoria shows that the President’s in-tray is full of problems – and the biggest is two words that many people have never heard: “fiscal cliff.” This is the term applied to the tax cuts on personal income, capital gains and dividends – originally introduced by George W Bush and extended by Obama – that are due to expire in January. The worry is that the ending of these tax cuts will hit ‘middle Americans’ particularly hard – which will in turn take spending power out of the US economy and see it ‘fall over the cliff’ and back into recession.
Therefore Obama must negotiate with a Republican Congress to find a compromise. This hasn’t been easy over the last four years and it won’t be any easier from January when a new – but still Republican-dominated – Congress is sworn in. With $607bn of tax rises due to hit the US economy in January, all commentators see this as the number one priority. If nothing is done about the ‘fiscal cliff’ it is going to impact adversely on the US domestic economy – and then on the world economy.
Assuming a compromise is reached on this issue, it will still require a huge effort to get the US economy moving again. At the moment it is growing at 2% per year and unemployment stands at 7.9% – and there’s the small matter of $16tn of debt, which Obama has pledged to reduce. Doing this while keeping his commitment to increase Government investment in education, new sources of energy and measures to boost the economy will be a massive challenge.
Looking abroad, Obama must confront Iran’s nuclear programme, and find a way to deal with China. America has to trade with China – but at the same ensure that jobs and technological knowledge are not exported there, to the ultimate detriment of the USA. When all that’s done, he must pray that Europe finds a way out of its debt crisis.
That’s a daunting list – and yet we are broadly optimistic that a second term for Obama will be good for the US stock market, which will in turn be good for world markets and by implication, your savings and investments. There are four principal reasons:
First of all there’s the lesson of history. The US market has traditionally averaged bigger gains under Democratic Presidents than under Republicans. On election morning 2008 the Dow Jones index stood at 9,319: on election morning 2012 it stood at 13,112 – that’s a rise of 40% under a President who many people thought would be unfriendly to business.
Secondly, Ben Bernanke will stay on as Chairman of the Federal Reserve – meaning that the policy of Quantitative Easing, which has been so much of a help to capital markets, is highly likely to continue. Wall Street likes Bernanke, and would have been unhappy to see him replaced as would undoubtedly have been the case if Mitt Romney had won.
The likely continuation of QE means that interest rates should stay low. Although this isn’t good news for savers, it is good news for the ‘job creators’ that Romney alluded to in his concession speech.
Finally, a Democratic president and a Republican Congress might be a political problem – but it’s a problem that markets like, simply because it means lots of compromises and a continuation of the status quo. There are not going to be any radical policy initiatives in the next four years.
Politics – as Harold Macmillan so famously remarked – are governed by “Events, dear boy, events.” There are bound to be plenty of ‘events’ for President Obama to deal with in his second term, but overall we feel that the economic outlook is gradually improving. This doesn’t mean though, that it will all be plain sailing. If you have any questions about the inevitable peaks and troughs along the way then, as always, we are just a phone call away.
Do feel free to get in touch with us directly if you have any questions around this topic.
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