Yesterday evening the polls closed, the votes were tallied, and the campaign commercials on TV were replaced with the more familiar car dealer and furniture store ads.  Another Presidential election is over, and a new term begins soon.

The closeness of this contentious election means that no mandate can be claimed by either side.  The electorate has been pretty evenly divided since at least 2000.  With every election since then, the winner has declared a “mandate” and then proceeded to over-reach.  Those who believe that President Obama’s agenda will be implemented as a rubber stamp should remember the split leadership in the Congress will require bi-partisan compromise to enact legislation.  This is one of the advantages of our form of government in the US.  I believe that if there is one mandate issued by voters, it is that they expect bi-partisan compromise rather than partisan sniping and posturing.

What can we expect now that President Obama has been re-elected, a Republican majority has been retained in the House of Representatives and a Democratic majority has been maintained in the Senate?

First, expect the markets to bring European economic woes back into focus.  In the bright light of the Presidential campaigns, reports about other world developments were pushed to the background.  The news there is not good.  Germany, considered the strongest economy in the Euro Zone, reported very weak economic growth over the past week.  There continue to be woes in Greece (who will need another bailout) and Spain, along with legitimate worries that this decline could spread to other Euro Zone economies.  At best, we expect that the Euro Zone will experience a recession that will range from mild in some countries to rather drastic in others.  Since the Euro Zone makes up a large part of the world’s economy, this will have impact world-wide.

Next, issues around sequestration (the so-called “fiscal cliff”) need to be dealt with before year-end.  We continue to believe that sequestration will likely be avoided simply because it is bad policy and everyone has too much to lose.  But there could be damage to the economy and the markets as this issue is debated.  I heard some commentators this morning opine that if the President does not get his way on taxes, then he may choose to go over the fiscal cliff.  If so, taxes will automatically be raised and the negotiations will switch to which tax rates to decrease rather than which taxes to raise.  However, this tactic would fly in the face of the bi-partisanship that voters are seeking.

We believe that tax reform and entitlement reform are two major issues that the President and Congress need to address in 2013.  While we believe that Governor Romney was more likely to push forward with tax reform, there is no reason to believe that President Obama will not pick up the mantle in this area.  Tax reform would eliminate some of the uncertainty facing the economy.  Uncertainty over tax reform, regulatory red tape and reservations about the Affordable Care Act (“Obamacare”) were listed as the major impediments to hiring and capital expenditure decisions according to a recent survey by the National Federation of Independent Business, an organization of small business owners.

As for entitlement reform, we believe that both candidates were somewhat disingenuous during their campaigns.  If they were being honest, they would have mentioned that raising taxes and limiting discretionary spending would only go so far in reducing the debt burden of future generations.  Over the next few decades, entitlements (and the interest on the debt to pay for the entitlements) will take up an ever-increasing percentage of the federal budget.  Entitlement reform has sometimes been referred to as the “third rail” of politics; politicians consider it too dangerous a topic to discuss.  However, in our opinion, this is something that will need to be addressed or we (or our progeny) will face much bigger consequences later.

Last, we do not think that the election results foretell an imminent collapse of the US dollar as some believe.  We also do not think you should go out and buy barbed wire, new firearms or fill your bomb shelter with gold bars.  At present there are no credible threats to supplant the US dollar as the reserve currency of the world.  Of course, there may be bad policy decisions made that could cause a decline in the US dollar over time.  It’s also possible that other currencies from faster-growing economies may appreciate relative to the US dollar.

There are reasons to be optimistic over the long-term (see my blog: Why I am Optimistic).  Specifically, the developing resurgence in residential real estate and the progress toward increased energy independence have momentum and will continue to have a gradual, positive impact on the US and world economies.  Again, there may be bad policy decisions implemented that could slow (but not stop) the momentum from these developments.  We will keep an eye on these issues and update you as the situations play out.

Please contact me with any questions you may have about these thoughts.

Michael Joyce, CFA, CFP