Would it have made much difference if the election had gone the other way?
By Dave Scranton
In the grand scheme of things, would a Romney win really have made that big a difference?
It didn’t take long for pundits and prognosticators to switch from trying to forecast the outcome of the presidential race to trying to predict what it means for investors. Within our industry, there is an awful lot of hand-wringing taking place in the wake of President Obama’s re-election, the popular wisdom being that a Romney victory would have been better for business and possibly the economy overall.
Certainly, Wall Street seemed to share that sentiment, as the Dow Jones Industrial Average had its worst day of the year following the election, dropping 313 points. The S&P 500 and Nasdaq both posted similar declines. Of course, Obama’s re-election and its fiscal implications were likely only part of the reason for the downturn. Remember, we’re smack in the middle of a long-term secular bear market cycle, and stock market volatility is par for the course.
That said, I’m certainly not suggesting that those advisors and investors worrying over the possible fallout of the Obama win don’t appear to have legitimate cause for concern. Obama’s tax plan in particular — which calls for tax increases for the wealthy, including capital gains taxes and taxes on dividends — has the potential to depress asset values overall, since wealthy investors generally have the biggest influence on the markets. At the same time, the Obama plan could undermine the tax advantages of certain investment products.
In the grand scheme of things, however, would a Romney win really have made that big a difference? Possibly the markets would have responded more favorably in the short term because his policies appeared much more “business friendly,” but at the end of the day, we’d still be dealing with the same global and domestic issues that are the real foundation of investor fears and all our economic woes.
In a previous post, I used a family budget formula to illustrate how our country is not only drowning in debt, but essentially bankrupt. Our situation is really no less dire than that of Greece and some other Eurozone countries, and the only reason we haven’t declared bankruptcy ourselves is that we’re still the world reserve currency and have the ability to keep printing money and attempting increasingly ineffective quantitative easing measures. No matter who’s president, there is obviously no easy fix for this mess — which is why Congress and the subsequent bipartisan “super-committee” assigned to tackle the debt ceiling has done nothing but kick the problem down the road several times already. Now, of course, we’re nearing the end of the road and approaching the so-called fiscal cliff of drastic debt reduction measures set to kick in automatically at the end of the year. Under that plan, the Bush tax cuts for all taxpayers will expire, as will the temporary payroll tax cut which was extended by President Obama and Congress in 2011. Plus, a round of cuts in military and so-called discretionary spending will begin in January. Economists predict that if nothing is done to modify these plans, the result will be as much as four percentage points of gross domestic product growth sucked out of the economy in 2013 — enough to officially force it back into recession.
Already a lot of big investors are reportedly unloading assets in anticipation of the “cliff,” despite assurances from politicians that it can and will be avoided. Some have forecast this trend could continue through the end of the year, possibly culminating in a huge sell-off in December. (Keep in mind, our current secular bear cycle has experienced two major market drops so far, while others throughout history have been marked by three or more.)
No matter what happens, in my opinion it won’t change the fact that certain investment instruments and strategies are going to continue to be preferable to others for as long as it takes this secular bear cycle to run its course, regardless of who’s in charge — which is ultimately why I’m not having heart palpitations over the Obama victory (like some of my fellow advisors) any more than I would have been doing cartwheels had the election gone the other way. Because my business model is based largely on long-term economic and market trends, I stand by the opinion I shared with many clients even before the first ballot was cast on November 6th: When it comes to true economic recovery, sustained market growth and making the right investment decisions for these times, it probably doesn’t matter much who’s sitting in the Oval Office.
Need further evidence? Consider the secular bear market cycles of the past, starting with the one from 1899 to 1921. It spanned five U.S. presidents and two party changes. The next long-term secular bear cycle, 1929 to 1954, went from Hoover to Eisenhower, with FDR and Truman in between. And the 1966 to 1982 secular bear market also spanned five presidents and two party changes. The point is, while politics and policies certainly have a huge impact on the economy, when it comes to long-term secular cycles and the natural biorhythm of the markets, history suggests that a presidential and/or party change is no panacea.