* A Split Congress Portends More Gridlock. Historically in gridlock conditions, Small Cap stocks perform poorly, Large Caps are unaffected and corporate bonds perform better. Given interest rates’ current anemic levels, it is not likely that bonds would be in favor. Ultimately, policies matter, but having one party control Congress and the Presidency could be hazardous for the economy and capital markets as a whole. The president can be held in check to a certain extent; however, he maintains many executive powers to push his agenda without congressional approval that could prove negative for the market, such as, changes in banking regulation, government contracts, etc.
* Fiscal Cliff Aversion Later vs. Sooner. While a total tumbling over the fiscal cliff will likely be avoided, it may play out like the eleventh-hour negotiations for lifting the debt ceiling. With momentum from his victory, the president will push limits on the amount of concessions he can garner. Chances are we will witness a slight fall over the cliff, meaning higher taxes and spending cuts. This may mean increased volatility through year-end.
* Higher Taxes are Inevitable. The president’s stance on the expiration of Bush-era tax cuts is clear. He wants the lower tax rates to expire for those with incomes above $250,000. He may concede to adjustments to the budget sequestration, but changes to the death tax, capital gains and dividend income, and income tax rates remain in the cross hairs. His victory also assures that top earners will see the 3.8 percent tax on investment income brought about by health care reform. We may not face a 3.5 percent GDP drag from higher taxes and spending cuts in 2013, but GDP growth will likely face friction of at least 1 percent to 2 percent.
* Interest Rates Will Remain Low. Interest rates remain an important variable for the markets. A projected near-term negative of a Romney victory was an increase in interest rates. Speculation had Romney replacing Ben Bernanke as Federal Reserve Chairman, which in turn, could have resulted in a faster rise in interest rates. Longer term this would not be a negative, but if done too quickly it could have undermined the fragile recovery, bringing an unintended reversal of the housing recovery. The interest policy under President Obama will most likely remain at the stated FOMC target of 0 percent to 0.25 percent through 2015.
The Unknowns. Popular opinion casts Obama as anti-business and as a wealth re-distributor. Will the close call of losing total control of Congress in 2010 be enough to shift him closer to the middle? There may be hope given the House of Representatives is projected to be solidly in control by the Republicans.
Over the coming weeks, I will discuss initiatives that should be considered to best position your portfolio for long-term prosperity.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.