From the desk of Peter Blatt

October 24, 2012

We are rapidly approaching the Presidential Election; an election upon which most economic forecasts depend. A big disclaimer: we can evaluate the potential effects of various election predictions. However, there are many variables involved beyond who wins, including the size of the victory, who controls Congress, and to what degree.  With the disclaimer out of the way, here are the Predictions:

If Romney becomes President:

Currently most small investors (as opposed to professional traders who have benefited the most from recent stock rallies) are playing it very safe by moving money from stock mutual funds to safe havens like Treasury bonds or Gold.

This is because smaller investors are led by large fundamentals and these large fundamentals, such as debt and deficit levels, are currently horrendous. The fact that the current administration is intent on printing money (Quantitative Easing) to solve our economic issues makes the average investor all the more nervous about taking risk. Overall, if there is a Romney victory it should be positive for stock markets.

The probability of a political deal to address the budget deficit and avoid the fiscal cliff looming at the end of the year is much greater. This is particularly so if the Republicans hold the House, even if the Democrats control the Senate, since Romney has worked such bipartisan deals in the past as Governor of Massachusetts.

Unless the European financial system doesn’t deteriorate further, this should be good for bank stocks, particularly blue-chip names like JP Morgan (JPM) and Goldman Sachs (GS).  Much of the Healthcare sector may benefit, including medical device makers which are poised to get hit with taxes if Obama Care is fully implemented. Defense stocks should be favored because Romney has promised not to cut defense budgets whereas a second term for President Obama should make sizable cuts. An improving economy should also help high-yield debt (lower rated corporate bonds) and municipal bonds. States and cities remain under tremendous fiscal pressure given the continued slow economy. Many strategists believe the best way to revive the economy is for a tax overhaul along the lines advocated by Paul Ryan which should boost muni bond prices.

If Obama remains President

Markets have recovered from their lows during President Obama’s first few months in office. This is mostly powered by fiscal and monetary stimulus. If Obama retains his seat, expect interest rates to remain low and the stimulus to continue for as long as it works.  Still, it’s safe to say that most investors believe a second Obama term is bearish for the economy and stocks, given his intention to raise taxes (both personal income and capital gains taxes), and as the impact of Obama Care is fully felt by businesses.

Another significant worry for the economy and stocks is President Obama’s potential difficulty in bringing about a swift bipartisan agreement on the fiscal cliff. Delay and derision, such as that experienced during the Debt Ceiling Crisis, may lead to a highly challenging period for markets.  Beneficiaries of an Obama victory could be hospital HMOs and insurance stocks as the health-care mandate may force more people to seek coverage through HMOs. There are also a number of ‘defensive’ stocks that generally outperform during a slow growth economy.

We like Infrastructure plays under Obama and Telecoms – irrespective of the election winner. Other investments that should benefit from this environment: Investment-grade bonds of big companies because they offer attractive yields and have low default risk due to their extremely healthy balance sheets.

The Fiscal Cliff

Once the election is over, our attention will turn to the Fiscal Cliff which, together with Inflation, is one of our biggest concerns for 2013. It’s called the fiscal cliff because without a compromise, the next president must, according to law, enact a series of massive tax increases and budget cuts that could send the economy into a double-dip recession and lead to a severe correction in the stock market. Of additional concern is the potential for both parties to dig their heels in and gridlock a decision.

 Tax Man is coming…if we hit our Fiscal Cliff and tax rates increased based on current legislation.

What’s to Come?

Highest Federal Tax Rate                                                                 2012                  2013*

Investment Income (e.g. interest, rents)                   35%                    43.4%

Dividends                                                                                            15%                   43.4%

Long-term capital gains                                                           15%                    23.8%

Wages                                                                                                 36.4%                   41.9%

*2013 includes the tax health care act, informally known as Obama Care

Based on the track record of both clients brokering deals between disparate factions, the risk of fiscal-cliff chaos is strongest if President Obama wins a second term, the Democrats take more seats in the Senate and the Republicans maintain control of the House. In that situation, Treasuries and recession-resistant stocks might be two obvious places of refuge. Sell anything with risk tied to economic performance, like high-yield debt and retailers.

Nobody knows who will win the election but no matter who it is, don’t let your financial future be negatively impacted.  Act now…call Peter today to discuss strategies you can implement immediately to protect your assets. 

Until next time,