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Brian Jacobsen

Election 2012: Some answers, more questions

AdvantageVoice® Blog—11-8-12
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Ever since the mid-term elections of 2010, the House of Representatives has been controlled by Republicans, and the Senate has been controlled by Democrats. With President Obama’s re-election, nothing has changed—at least, on the surface.

Presidential contender Mitt Romney put on a very solid showing, gathering just shy of 50% of the popular vote. Perhaps he played things too conservatively (pardon the pun) after his outstanding performance in the first of the three presidential debates. Perhaps Hurricane Sandy gave President Obama a very public and well-timed opportunity to appear presidential. Regardless, President Obama will be sworn in for a second four-year term in January 2013.

Early in the campaign season, it appeared as though the Republicans would lose a little of their majority in the House, but perhaps take control of the Senate. While the Republicans did lose a little power in the House, the Republicans actually lost seats in the Senate. The Democrats were not able to pick up enough seats in the Senate to push through social issues, but with a simple majority they can advance legislation on budgetary issues. And really, that’s what investors are probably most concerned about: What is the tax and spending environment going to look like in the U.S.?

Although the balance of power hasn’t changed in the U.S., the President only commanded 50.1% of the popular vote, hardly a mandate to push forward with his agenda of balancing the budget on the backs of those who make more than $200,000 a year. Similarly, the chiseling away of Republican power in Congress likely means there is no mandate for balancing the budget purely by cutting spending. Instead, there will have to be compromise.

A door has been opened for the President by the Speaker of the House of Representatives, John Boehner. It will take the President to reach out to Congress with a plan to cut spending and increase tax revenues, provided it doesn’t reduce incentives to invest for growth. This should be easy as Rep. Boehner and the President already had an agreement along those lines during the summer of 2011 that got scuttled for unknown reasons. Both sides have gotten the message from voters: Knock it off and learn to compromise.

The days between the election and the end of year should prove to be a template for what investors can expect over the next two years. If there is an agreement to extend current taxing and spending policies, thereby avoiding the fiscal cliff, then 2013 to 2014 could be a lot like the middle of the 1980s and later stages of the 1990s. In the mid-1980s, President Ronald Reagan (a Republican) worked with Democrats to implement significant tax reform. In the mid to late 1990s, President Bill Clinton (a Democrat) worked with Republicans to get the U.S. federal government’s budget into surplus.

Failure to compromise on the fiscal cliff will not bode well for the U.S. markets for the next two years, making it more like 1948 when Democrat Harry Truman was re-elected on a platform of striking against a “Do Nothing Congress.” In the 1948 election, the Republicans lost control of both the House and the Senate and the Dow declined 3.8% the day after the election. From the election to the end of the year, the market was down over 7%. Although a significant decline, it was part of a bottoming process for the stock market from whence the market entered a long-lasting bull market.

The day after the 2012 election, the Dow lost 2.36%. Will it be like 1948? Or will it be like 1986 where stocks went on a tear after the mid-term election? It looks like it depends on the ability and willingness of politicians to get a deal done.

The views expressed are as of 11-8-12 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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