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US view: Senate elections key to avoiding the fiscal cliff

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With less than a month to go until the US presidential election, Barak Obama’s small but consistent lead in the polls has been eroded and the race has become much more difficult to predict.

Following the first two televised debates, a strong performance by Mitt Romney has given the Republicans a sniff of a victory.

Analysis from Fidelity points to the strong correlation between a victory for the incumbent and the performance of the US equity markets. With the S&P 500 currently near its highest values for four years, this would suggest the likelihood of a victory for Obama.

However, analysts suggest that the outcome of the presidential election could be much less significant than the elections for the US Congress

Currently the Republicans have a slim majority in the Senate, while the Republicans have a majority in the House of representatives and concerns that a similarly split Congress, with no party in overall control will lead to gridlock.

An analysis of the election by investment managers Neuberger Berman suggests that regardless of the Presidential race, the outlook is for a divided congress.

It says: “Unfortunately, the highest probability scenario creates the most uncertainty in terms of predicting policy decisions going forward. In the past few years, the legislature has often been paralyzed by partisanship at the expense of practical policymaking. It’s hard to know whether the upcoming elections will remedy the situation and somehow prompt timely effective action on the fiscal cliff—especially given that some action is required before the start of the year when the new Congress convenes.”

Schroders head of US large cap equities Joanna Shatney is equally concerned with the possibility that no overall majority will result in a lack of action dealing with America’s pressing economic issues.

She says: “I think the bigger issue is going to be control of the Senate, which is a topic of much debate.  While the outcome will be important because the House is already controlled by Republicans, neither party is likely to win by a majority and have complete control. The risk here is that we come out of the election process with as much political gridlock as we had going into it. The consensus view for investors, and we are very much in line with this view, is that the fiscal cliff gets dealt with by pushing it out 12 months.”

The fiscal cliff, a combination of an expiry of temporary tax cuts, an introduction of new healthcare taxes and the start of central Government spending cuts. The combination is predicted to act as a drag on US GDP in 2013 of between 3 to 5 per cent unless some government spending cuts are delayed.

However, in the short-term, there could be a stockmarket bounce on the back of an Obama victory.

Fidelity Worldwide Investment investment director Tom Stevenson says: “Looking at stock market performance following the last 12 elections suggests that investors should, in the short term at least, be rooting for an Obama victory. History shows that markets tend to rally after a win for the incumbent party by more than 10 per cent on average, but fall modestly if the challenger is successful.”

But Nueberger Berman suggests that regardless of the result, the short-term impact on US equities will be negligible: “Notwithstanding the constant election headlines to come and the immediate implications for the fiscal cliff, the main economic effects of an election tend to be long term in nature. In the near term, we think investors should not be too distracted by political rhetoric and instead continue to focus on fundamentals affecting the economy.”

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. everybody should express his opinion…these elections will touch everybody of us.
    follow one of this links

    support Obama online (http://electionsmeter.com/polls/barack-obama)
    or
    support Romney online (http://electionsmeter.com/polls/mitt-romney)

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