New York - US investors will hit trading floors this morning with the
same president and the same problems in gridlocked Washington. First up:
a looming budget crisis that could send the US economy reeling.
Barack Obama beat back Republican challenger Mitt Romney to win a
second term, but he will still have to contend with a
Republican-controlled House of Representatives that could make forging a
compromise on pressing issues like the coming “fiscal cliff” difficult.
“There will be an immediate shift to government gridlock and
the fiscal cliff issue, and that will be a headwind for stocks,” said
Michael Yoshikami, chief executive officer and founder of Destination
Wealth Management in Walnut Creek, California.
The fiscal cliff
is a $600bn package of automatic tax increases and spending cuts,
scheduled to take effect at the end of 2012, that could severely strain
Obama is expected to demand tax increases for
the wealthy as part of a deal to reduce spending to tackle the nation’s
deficit. Many investors thought that Romney as president-elect would
have had a smoother time in negotiations.
“The real challenge is
for (Obama) to bridge the differences with Congress and work to get in
the middle,” said Jason Ader, a former Wall Street gaming analyst and a
Steven Englander, Citigroup’s head of G10
foreign exchange strategy, said markets could panic towards year-end if
it looks as though no deal is imminent to avoid the fiscal cliff.
that happens, investors will think twice about lending the US
government money at low interest rates, which would strain the economy,
widen the deficit and hurt the dollar. It also raises the possibility
that major credit rating agencies will cut the US debt rating.
& Poor’s stripped the US of its pristine triple-A rating in 2011;
the agencies have said they will evaluate budget negotiations and
solutions and may take action next year.
Investors have had a
tendency to downplay problems emanating from Washington, only to find
themselves surprised when lawmakers cannot get together on critical
The market reacted harshly to Washington gridlock after
failed legislation to backstop the banks in 2008 and again during
protracted talks to raise the US debt ceiling in 2011.
Tilson, a hedge fund manager and one of the only managers in the $2
trillion industry publicly to endorse Obama for a second term, said he
was optimistic that the two parties would compromise.
“This was a
victory for moderates,” he said. “I hope both parties recognise this
and move towards each other - to the centre - to address the pressing
problems our country faces.”
The end of the drawn-out election
campaign puts to rest questions about regulation and monetary policy -
Romney had said he would replace Federal Reserve chairperson Ben
Bernanke - but some investors remained on edge about taxes and overall
Billionaire investor George Soros said late on
Tuesday that the re-election of Obama will open “the door for more
Soros, a major contributor to Democratic
causes, said in an email exchange that he hoped “the Republicans in
office will make better partners in the coming years.”
Clarity on the Fed, less on the economy
markets came into the night expecting Obama to win, most traders and
investors supported Romney, who raised more money on Wall Street than
Obama’s win did remove uncertainty about the
future of Fed policy. Romney had said he would replace Bernanke, whose
dovish monetary policy has helped propel gains in both US bond and stock
prices in recent years.
The benchmark S&P 500 has rallied
67% since Obama took office - one of the most impressive runs ever for
stocks under a single president.
Benchmark bond yields hit
record lows despite a downgrade of the US credit rating last year.
Cumulative returns for maturities on all US Treasuries are at 14% since
Obama took office, according to Barclays.
The Fed’s easy-money
policy has pushed down the value of the dollar, though, and some worry
more dollar weakness may be in store, particularly if investors see
signs of rising inflation.
“The market rewards this certainty by
bidding up gold and selling the dollar against all major currencies,”
said Axel Merk, president of Merk Investments in Palo Alto, California.
a second Obama presidency, Wall Street will have to forgo trying to
repeal Dodd-Frank financial reforms and instead continue to use personal
relationships in Washington to keep the law from harming firms, said
Karen Shaw Petrou of Federal Financial Analytics, a Washington-based
Wall Street has bristled at the reforms, which
include stricter capital requirements for banks, and the Volcker Rule,
which is intended to stop banks from making bets in the financial
markets with insured deposits.
But some welcomed the changes.
don’t think any reasonable observer would want to go back to the risk
that we had in the system before the financial crisis,” said Evercore
CEO Ralph Schlosstein.
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