Market Memo: This isn't what the markets wanted
President Obama’s reelection threw cold water on an equity market that was beginning to dream of the pro-growth policies a Romney administration might bring. It may have been more a case of wishful thinking than dispassionate analysis of the pending Nov. 6 vote, but clearly Gov. Romney seemed to be offering a much stronger prescription for economic growth—one built around tax cuts, tax and entitlement reforms, and regulatory relief.
Alas, that was not meant to be. So instead of getting something promising and new, the markets were left with something familiar and worn. Hence, yesterday’s sell-off. Looking forward, we offer our top 10 list of potential impacts on equities (the first nine are negative; the final is positive) now that President Obama will hold the office four more years:
- Obamacare won’t go away, which means states and companies that have yet to prepare for its implementation must now figure it into their costs and hiring policies.
- Dodd-Frank is almost certain to be enforced much more aggressively, a big negative for a financial sector still on the mend from the global financial crisis.
- Fed Chairman Ben Bernanke’s reappointment is assured, meaning financial repression—i.e., interest rates artificially held down at record lows by policymakers—will continue to distort economic and market behavior, and penalize savers over debtors.
- The energy sector’s move toward shale development and more off-shore drilling, both of which promote more energy independence, will likely slow.
- Major tax hikes are coming, potentially as soon as the 2013’s first quarter if Congress and the White House can’t agree on a way to deal with or at least delay the pending fiscal cliff of expiring tax cuts and mandated spending cuts.
- European-style tax increases and austerity measures are much more likely, and are much more likely to skew toward the tax-hike front, threatening the economy’s long-term growth potential.
- As Republicans are likely to shift more to the right, Obama and the Democrats are likely to shift more to the left, making common ground that leads to necessary compromise harder to find.
- A rash of year-end stock selling is probable, threatening a broader sell-off, as investors act to move to book profits before higher capital gains tax rates potentially take place.
- California voters approved a $30 billion tax increase that would push the top rate on incomes to 13% to raise funds for schools, teachers and colleges—a plan that could open the door to similar moves in other states as a way to deal with mounting teacher pensions and related costs. This Greek-style response to its fiscal problems is likely to leave California with lower growth and lower tax revenues for years into the future.
- Immigration policies should become much more constructive, with Republicans realizing that they must move on this issue if they want their party to be competitive in future elections. Should immigration reform be adopted, this could lead to a renewed burst of population growth in the U.S., which would be good for growth and help pay down the ballooning national debt.
Given this long list of mostly negatives, the PRISM asset-allocation committee met today and decided to take another four points out of equities, lowering the equity weight in our stock/bond portfolio model back to neutral for the first time since 2008. Although we don’t expect equities to move into a full-scale bear market, we think risk-reward for next several months is skewed downward. We will revisit our recommended allocations once the plan to address the fiscal cliff becomes clearer. Unlike four years ago, this election didn’t bring change. It brought more of the same. Unless there are much-needed halftime adjustments, our message for investors is to proceed with caution.
For a complete rundown of our recommended model allocations, go to our PRISM home page. You will need to log in or register if you haven’t done so already.