Beyond a doubt, the number one most asked question in my inbox is: What will happen to the markets if Romney/Obama is elected to President? And after last night’s rematch between the two in a town hall style debate, I’ve been flooded with even more questions. So I’m going to set the record straight today and lay out what I think will happen in the case of either scenario.
If Mr. Romney Wins
Thanks to his strong turnout at the first debate and his willingness to talk about the federal budget deficit, Mitt is suddenly leading national polls. Mr. Romney has rebranded himself as “Mr. Fix-it” and, the excitement of having a successful business guy run the country is steadily building momentum. If this momentum carries through campaign season, he could pull out a victory. Having a pro-business President would probably unleash all of the cash that has been sitting on the sidelines due to the impending fiscal cliff. Since Wall Street has not fully discounted a Romney victory, there could be a substantial rally, provided Mitt Romney quickly addresses the following:
- The Fiscal Cliff
- The mandatory defense cuts
- The impending 3.8% tax on interest, dividends and capital gains built into ObamaCare.
Another important note: Big American companies tend to keep their cash abroad because they get higher interest rates. And they’re reluctant to repatriate their money due to the higher taxes. If Romney is elected, he’ll champion for lower corporate taxes. In the long run, that will coax American multinationals to repatriate their cash back to the U.S., and this will provide a boost to the economy.
If President Obama Wins
If President Obama is re-elected for a second term, he will probably be a lame duck President due to the Republican majority in the House. As with the case above, President Obama will need to address the Fiscal Cliff, which will most likely be averted by raising the deficit ceiling again. But the real difference comes in the form of how businesses will be taxed, let alone the dividend and capital gains tax hikes that are in store for some investors. If President Obama keeps the status quo or raises corporate taxes, he removes the incentive for multinationals to repatriate their cash. Instead, multinationals will be more prone to buy their stock back as it will be the most efficient use of extra cash. While stock buybacks will benefit some investors in short run, the larger economic benefit comes from having this cash return to the U.S.
The Bottom Line
But I don’t believe that one victory over the other will cause a massive shock to the market. In fact, I believe that Wall Street will rally after the election for the simple fact that expectations will be set. Right now, there’s tremendous uncertainty about what to expect from election, from defense cuts to ObamaCare to new taxes. But once the new President is set, businesses and individuals alike can plan for the new order and move on. In either event, I recommend that you stick with fundamentally sound stocks (like those that are A- or B-rated in Portfolio Grader) so that you can weather this election storm with confidence.
What I’ve given you today is a brief digest of my thoughts on the election. Of course, every day introduces another flurry of headlines, so I’ll keep on top of the news and report back to you in this daily blog.