Obama's victory signals green light for markets

Obama’s win in the US election, with Democrats likely retaining the Senate and Republicans retaining the House, means more of the same in terms of divided government.

Now, with uncertainty regarding who will be the next President out of the way (assuming no challenges), in reality it's more of the same with attention turning to solving the fiscal cliff. On this front negotiations are likely to be difficult and protracted and the Republican controlled House may dig its heels in (particularly if Obama wins the presidency but without winning the popular vote - as I write though is he is ahead on the popular vote).

Ultimately I think a compromise will be reached and the fiscal cliff will be cut back from a recession driving 4.3% of GDP as per current law to something more like 1.5 to 2% of GDP, which will enable the US economic recovery to continue. As a result sharemarkets may see a bit of a bit of uncertainly until some resolution regarding this is in sight.

The so-called “fiscal cliff” will be reached January 1 next year, followed soon after by the need to raise America’s debt ceiling again and the need to come up with a long term plan to reduce America’s budget deficit to head off more ratings downgrades. America has a bigger public debt problem than Europe in aggregate but as yet it hasn’t really dealt with it.

While the major ratings agencies have retained their sovereign ratings for the US this year, they have warned of downgrades if it doesn’t bring its debt under better control. The US needs a long term plan to reduce its budget deficit. The trouble is that the fiscal cutback that is scheduled to occur in 2013 under current law will occur too quickly.

The main measures that will drive the “fiscal cliff” are the expiration of the Bush era tax cuts, the expiration of the payroll tax cuts and extended unemployment benefits that were part of President Obama’s stimulus measures and cuts to health and defence that flowed from last year’s debt ceiling agreement (referred to as a “sequester”).

However, beyond any short-term reaction, President Obama’s victory likely ensures that the US Federal Reserve will remain highly active in promoting US growth beyond the expiration of Chairman Bernanke’s current term in January 2014 (whereas Mitt Romney had committed to not replacing Bernanke and would have likely replaced him with a less pro-active chairman).
Graph for Obama's victory signals green light for markets

Finally, it's worth noting that while the Republicans are normally more pro-business, shares have actually done much better historically under Democrat presidents than under Republicans. Since 1945 US shares have returned 15.1% pa when a Democrat has been in the White House compared to 10.2% pa under Republican presidencies. In recent times this has certainly been borne out under President’s Clinton and Obama in contrast to the experience under President Bush.

More broadly my view remains that shares are heading higher on the back of attractive valuations, a gradual improvement in the global growth outlook and very easy monetary conditions. I continue to wonder whether the fiscal cliff is another Y2K. Things everyone talks about often turn out to be non-events, as far as markets are concerned.

Dr Shane Oliver is head of investment strategy and chief economist of AMP Capital Investors.

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