Economic News & Analysis—August 20, 2012
An investor’s guide to the presidential electionBy Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
The November election matters to investors. With the entire House of Representatives, one-third of the Senate, and many state and local seats in question, the presidential race is just one of many to watch. All together, the new makeup of two of the branches of national government will likely have a profound impact on tax policy, the federal budget, and regulatory interpretation and enforcement. In addition, with three justices at or approaching retirement age, the next president will likely determine the political complexion of the Supreme Court for many years to come.
One outcome I’m anticipating is that the House will retain a Republican majority. Taking this as a given, I believe there are three election outcomes for which investors need to prepare.
Split Senate: Why it matters who’s in the White HouseWhen there’s a tie in the Senate, the vice president casts the tie-breaking vote, effectively tipping the balance of power to his party. Under President Obama, a split Senate would effectively be controlled by the Democrats. It would be functionally similar to a scenario in which President Obama is re-elected along with a Democrat-controlled Senate. Under Mitt Romney, a split Senate would effectively be controlled by the Republicans and would be functionally similar to a scenario in which there’s a Republican-controlled Congress (both the House and the Senate).
Republican-controlled Congress: Significant changes in storeIn a Republican-controlled Congress, the party would play an important role in bringing legislation to a vote. This would lead to the Republicans retaining control of the legislative agenda for the next session of Congress and could result in significant proposals related to defunding the Affordable Care Act and the Dodd-Frank Act. Additionally, there could be significant changes to the tax code and the growth of federal government spending, though defense spending would likely continue to grow (benefiting defense industry stocks). Entitlement programs (Social Security, Medicare, and Medicaid) would likely have long-term reductions in their growth rates by means-testing benefits and increasing the eligibility age for benefits. These changes, however, would not likely affect any person who is 55 or older.
If Mitt Romney is elected president, he will likely sign these proposals into law, especially because it is highly likely that his candidate for vice president will spearhead the proposed changes. President Obama would likely veto changes that eliminate funding for the Affordable Care Act, but he may be more accommodating on the other issues. He demonstrated willingness to compromise at the last minute on many programs favored by Republicans after Republicans took control of the House with the 2010 mid-term election.
Implications of a Republican-controlled Congress to investors
Democrat-controlled Senate: A continuation of the status quoA Democrat-controlled Senate is likely only if President Obama is also re-elected. This outcome would, effectively, be a continuation of the existing state of affairs in Washington, D.C., and would mean at least two more years of the past two years: gridlock and buying time until the next mid-term election.
Implications of a Democrat-controlled Senate to investors
The bottom line for investorsThe upcoming election could significantly affect the markets. The most likely sectors that would benefit from a Republican sweep of the House, the Senate, and the White House are health care, financials, and energy, and defense-related stocks would also likely get a boost.
It’s unlikely that Democrats can wrestle control away from the Republicans in the House, but if Democrats retain control of the Senate, they could simply keep the status quo in place. That would likely mean continued high market volatility, as substantive reforms are pushed further into the future. Tax and spending reform almost necessarily needs to happen, but it likely wouldn’t until after the 2014 mid-term election, at the earliest. A divided government can lead to positive change, but only if you’re already on the right track. However, if we are left with a divided government, investors, I think, can still look forward to longer-term reforms and can continue to invest for growth. It just might take longer for those investments to pay off.