Having finally made it through the 2012 US elections, one wonders whether 2+ years of campaigning and billions of dollars spent were worth it. President Obama won reelection to a second term, while the Democrats and Republicans maintained control of the Senate and House of Representatives, respectively, albeit with smaller majorities. Having said that, several trends did emerge, and as many have warned, markets have already started to pivot to the elephant in the room: the fiscal cliff. Here are our four take-aways:
Extreme ‘Anti’ Strategies Lost (immigrant, abortion, tax, etc.) Candidates that adopted virulent ‘anti’ rhetoric were defeated. Anti-abortion candidates Todd Akin of Missouri and Richard Mourdock of Indiana lost US Senate races after outrageous remarks; anti-immigration efforts hurt Republicans in swing states (Florida, Colorado, Nevada). In addition, several Tea Party candidates defeated or pressured moderates to stand aside in primaries lost to moderates in the general elections (Maine, Pennsylvania, Connecticut, etc.).
Demographics Rule: Latino voters crossed the 10% threshold in this election, and together with African-Americans, women, and younger voters,were key to President Obama’s win, as well as initiatives on same-sex marriage. The Republican coalition of older, white, religious, and affluent voters comprised a shrinking proportion of voters and will need to expand to remain viable. Pundits believe this bodes well for immigration reform.
The ‘Sandy’ Surprise: Hurricane Sandy stopped Mitt Romney’s late surge and helped President Obama. Exit polls sited by one network said that 4 in 10 voters said the hurricane had a modest or significant impact on their final choice. Cooperation and effective management of the storm crisis by President Obama and New Jersey Governor Chris Christie won widespread support, with support from New York Governor Cuomo and Mayor Bloomberg, who noted that climate change issues were one factor that tipped him into supporting the President for reelection.
Leadership Trumps Partisanship. Drawing on earlier points, politicians who demonstrated leadership and got things done were seen as a welcome change to the hyper-partisan gridlock. House Speaker Boehner got the memo, saying the elections were a mandate for the two parties ‘to take steps together’ to boost the economy. President Obama talked about ‘compromises to move the country forward’. Others however have not, and has businesses nervous.
Concerns about the ‘carnival life’ in Washington (as well as trouble in Europe) pushed US stock markets sharply lower today (down 2.3-2.5%); their worst session since June. As we move to year-end investors and money managers will be tempted to lock in profits (and bonuses) and reduce exposure to markets, as we head to the holidays, which could put pressure on stock markets. This may be exacerbated by investors locking in profits at lower capital gains rates in case those rise in the future.
And with little change in net seats for either party in Congress, the pressure is on for legislators to work immediately toward a ‘grand bargain’, or at least a temporary moratorium on pending spending cuts and tax increases to give the new Congress time to work on a broad-based reform. This package will need to include a combination of spending limits and revenue increases to reduce the fiscal gap and longer term fixes to reduce the national debt. It will involve changes to Social Security (a higher retirement age perhaps), cost controls for defense, Medicare and Medicaid (health care costs remain the crux of the problem), and reduction of tax cuts, corporate incentives and other special incentives. These four areas comprise, together with interest on our existing debt, over 80% of government spending. Like banks, it’s ‘where the money is’.
Just as Hurricane Sandy demonstrated that environmental ‘events’ carry serious ‘tail’ risk for government, business, and households (low odds, but devastating impact), the fiscal cliff poses serious risks for the US and global economy. Typically economists talk about hurricanes as a one-off temporary hit to growth (of 0.45%), followed by a bump up when rebuilding efforts get underway. Moody’s Analytics estimates $50 billion in losses from Sandy (versus $80-90 billion from Hurricane Katrina). Regardless of your views on climate change, businesses will need to think about how to reduce risk from these ‘100 year floods that seem to be happening every two years’.
The good news is that the private sector continues to improve. Consumers have reduced spending and cut debt to help get their households in order, while the rebound in housing activity has helped reduce roadblocks to growth as sales and construction increase, supply shrinks, and prices rebound. The Census Bureau announced that the US added 1.15 million households in the 12 months that ended in September, up from 650,000 average of the previous four years. However until we see constructive action by the public sector, the economy will remain stuck in low gear.