What the Re-Election Means for Investors

Although the threat of the fiscal cliff looms and current market conditions will likely lead to high volatility, investors must remember that the market tends to bounce back quickly, said Anthony Brown, partner at Mercer, during the company’s post-election webinar. Brown cited last year’s debt-ceiling crisis, in which the market fell 20% but returned quickly.

Investors should think of the long-term horizon rather than just the short-term news items, he said. Overall, Brown said it is likely to remain a “very tough” investing environment.

“When talking to your clients, keep in mind that people will have very strong emotional reactions to what happened,” said David Kelly, global chief strategist at J.P. Morgan Funds, speaking about the recent presidential election. But, he added, it is important to remind people that even if the results weren’t what they wanted, logic—not emotion—is what’s needed in making investment decisions.

At the moment, the biggest drawbacks of investing are uncertainty and fear. But the outlook should improve if the economy is seen as growing, Kelly said. He pointed out that from an investment perspective, the economy can grow under a number of circumstances.

Looking back at the last 75 years of stock market returns, the average return is about 10%. But in those years with a Democrat in the White House and Republicans controlling at least part of Congress, he pointed out, the average is 15.4%. In other words, investors should not view the re-election of President Barack Obama as dire financial news.

(Cont’d…)

Wednesday was a bad day for the markets, Kelly noted, possibly because of the ongoing situation in Europe, the election and worries about the fiscal cliff. One key to the expiration of the Bush tax cuts will be how the Republican Party approaches a solution. Kelly feels there are three scenarios: an early compromise, which would be ideal, though unlikely; a last-minute compromise at the end of the year, or an overdue compromise sometime in 2013. “Either way, there will be a compromise,” he said.

John Boehner, speaker of the House, indicated they are willing to consider new revenue. Kelly said the first overtures from House Republicans will need to be steps toward compromise, so that would appear to be a reasonable notion. A good plan would be extending the Bush tax cuts and gradually allowing the deficit to come down. The two parties are not that far apart if they can find a political reason to compromise, Kelly said, though he would not bank on this happening early in the game.

A Romney presidency might have meant the appointment of a more hawkish Federal Reserve chairman, Kelly speculated, since Ben Bernanke will likely step down in January 2014. 

The reelection means the stock market will likely be more positive than the bond market for investors. “As we go into 2013, the way to go will be overweight with equities and underweight in fixed income,” Kelly said.

Low-volatility equities are a good option right now because they keep pace over the long term, Brown said. Diversifying growth assets into hedge funds and private equity will likely be a continued trend, he added.

There could still be a sell-off in the stock market, which would be undesirable, according to Kelly, as people try to sell off before the arrival of higher dividend taxes. “We could see a market correction,” he theorized, “probably not as bad as the one that we saw in 2011, which was a 19% correction.” Kelly cautioned that the worst thing for investors to do is sell out amid the market angst and then see the market soar. “The lesson is, don’t buy into it,” he said.

In other areas of monetary policy, Kelly’s expectations are that long-term interest rates will rise, the U.S. dollar will fall, and that the country will continue its progress on bringing down the deficit.