The US Presidential Election and its impact on Australia
The result on November 6 was not a complete surprise but it appears as if some market participants were expecting Romney to win. The result was an overwhelming victory for President Obama, particularly given that the US electorate was so polarised with high unemployment constantly being the main focus of the Romney camp. It was also a victory for the Democrats because they gained seats in the House and retained their majority in the Senate. In the Senate, there were originally 53 Democrats and 47 Republicans. It now looks like there will be 55 Democrats and 45 Republicans once the count is complete. The situation prior to the election remains in place although the President’s standing has strengthened.
First job of the day? Tackling the fiscal cliff
Obama doesn’t have the comfort of victory. The fiscal cliff problem of around $600 billion which is made up of tax increases and spending cuts needs to be dealt with before the end of the year. However, with Thanksgiving on 22 November, there is little time left. Between now and 3 January 2013 when the new Congress convenes, which is known as the ‘Lame Duck’ session, the President has an opportunity to reach out to the Republicans and rally a deeply divided Congress to resolve the fiscal crisis and save the US from being downgraded.
Obama is likely to extend the expiring Bush cuts which will be arrived at through bi-partisan negotiations and is also likely to opt to negotiate on the debt ceiling after the new Congress is convened. The most likely outcome could be a package similar to the Bowles/Simpson Plan that combines budget cuts, entitlement reform and some tax increases.
The US economy is vulnerable due to the fiscal contraction if an optimal bi-partisan compromise is not reached because of philosophical disagreements within the parties over tax policy, energy policy and social security. The hardline Republican approach conveyed to voters showed they were out in touch with reality. Hardliners in the party are now likely to be sidelined by moderates who will be more willing to agree or reach out for a bi-partisan compromise. It appears that John Boehner, Speaker of the House, could once again be the key negotiator between the Republican Party and the President. Senate minority leader, Mitch McConnell, is likely to join John Boehner in reaching out for a compromise as hardliners such as Eric Cantor, the Leader of the House, and the hardline approach taken by the Republicans hasn’t resonated with the average American voter, making it possible that the Republicans will be left in a political wilderness for the next four years. It is also likely that the President during his next four years will be magnanimous and pragmatic when it comes to compromise.
What other challenges does Obama face?
Other challenges to the President is the appointment of a number of key members, including Secretary of the Treasury, Secretary of Commerce, Secretary of Defence and Secretary of State. These must all be passed by the Senate so more compromise is called for. In his second term, the President now faces difficult problems relating to the Middle East and North Africa, as well as changes in the political landscape in China and other political developments around the world. This will demand a lot of his attention.
What does this mean for investment markets?
In the absence of a realistic compromise or solution to the fiscal cliff, it’s possible that the financial markets will force Congress to compromise and the President will reach out to finalise an agreement to keep the economy ticking. All this means is that volatility will remain elevated, markets will remain turbulent and uncertainty will be high. The good news is that the Federal Reserve will feel less threatened now given that president Obama is still at the helm.
As always stay firm in your own strategy as that is all you can control.