What the Obama victory means for market volatility

by Wayne Ferbert on November 7th, 2012

In four words: it doesn't look good. Take the market declines today out of the equation. Todays losses represent the instant reaction to the removal of the chance that Romney would win. 

Volatility is sure to increase - and the reason is legislative uncertainty is higher in an Obama presidency. That might surprise some readers. After all, we have had four years of Obama so you might ask: "doesn't his win just mean more of the same?"

The same of what? Obama's only legislative focus was ObamaCare which no one would call business friendly. (I will not trash ObamaCare completely though as it was a noble cause) His other economic and commerce related packages were mostly bail out and crisis related. I would say we only know two things - one he told us and one we observed.

The one he told us:  taxes are going higher for the wealthiest earners making over $250k per year. It was a linchpin campaign promise and consistent with his re-distribution beliefs. 

The one we observed for the last 4 years: he is unable or unwilling to work out compromise with Republican Congressional leadership on key economic legislation. It is obvious the two camps don't see eye to eye on the issues. And both parties are to blame for the stalemate - you can't blame Obama by himself. However, the Obama White House is certainly on pace to set a record for stalemated, gridlocked legislation. 

This leads us to the fiscal cliff. It is coming and it is a package of spending cuts and tax hikes that if activated and in place for long will certainly create a decease in GDP - ie, a recession.
The Obama win certainly guarantees a stare down with the GOP controlled House of Representatives. Obama has drawn a line in the sand and said he would veto any legislation that extends the Bush era tax cuts for the wealthy.  Those are the cuts set to expire with the cliff - but they are the cuts for everyone - middle class included.

The Obama win most certainly increases the risk of the fiscal cliff legislation becoming active at the beginning of the year. Personally, I believe the GOP will not blink on the tax rate issue either - and the cliff will become our new reality. The pundits think the GOP will blink. I do not - at least not by January 1st. 

There is room for compromise in the ideas that Romney put forward that I believe will eventually become law: many deductions will be severely limited going forward especially for the wealthy. But in exchange for those deduction changes, I predict the high end tax rate stays the same. This would be good for small businesses also - especially the small businesses that earn the most - and by extension hire the most. These small businesses will enjoy the predictable tax rate they will get to apply to the earnings from expanding or investing in their business.

Hopefully, both sides come to this compromise sooner rather than later. But we'll see. The special interests that work to protect these deductions will be hard at work - and that could easily delay any compromise. The last time that Congress worked to open up and address these kinds of deductions and loop holes, the process got significantly derailed and we ended up with many of the convoluted rules we have today.

Consider all of these issues and you still have uncertainty in Washington. And you still have significant gridlock. 

That translates to an increased risk that we go over the fiscal cliff. Add in the recent lackluster earnings season and you have a recipe for a volatile market. The kind of market you would want to be hedged in!    

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