In the wake of last night’s U.S. election results, CIBC World Markets Inc. says that the combination of re-elected president Barack Obama and continued Republican control of the House of Representatives means markets face ongoing legislative gridlock and policy uncertainty.
“By adding four more years to Obama’s tenure, voters have opted for a known horse over a less familiar one. However, the Republicans’ retention of the House, the Democrats the Senate, means Obama will face the same fractured landscape that impeded legislative progress during the last two years of his term,” it says in a new report. “That leaves markets with significant policy uncertainty leading into the fiscal cliff and debt ceiling discussions.”
CIBC says that upcoming discussions around the so-called “fiscal cliff” in the U.S. will be challenging as Obama faces a Republican-led House. The U.S. reaches its debt limit at the end of the year. “A multi-year deal could be struck during the Congressional ‘lame duck’ session (starting November 13th), or barring that, a temporary spending bill to tide over expenditures for a few months would allow the president and Congress to work on a more comprehensive plan come 2013,” it says.
The president and Congress “will be under pressure to come to an agreement to avoid a repeat of the mid-2011 brinksmanship game, although any deal involving new cuts to spending would only layer onto existing fiscal austerity,” CIBC notes. And, in addition to these immediate fiscal issues, U.S. policymakers must also address longer-term fiscal sustainability.
CIBC says that, under Obama, growth “will likely track slightly higher” than what a Romney presidency would have seen, due to Obama’s preference for reducing the deficit via tax increases rather than cuts to government spending.
Democratic presidents have been OK for stocks, CIBC says, however, it notes that Obama’s plans for a rise in qualified dividend/long-term capital gains rates “could pose some near-term valuation risks for equities.” And, it suggests that a planned increase in in those rates at year end, could spark some selling pressure now to ‘lock in’ at the lower rate.
On a sector basis, it notes that Obama’s victory is a potential plus for alternative energy. The Keystone XL pipeline should also see approval in the months ahead, it says, “although on other elements of conventional energy production, the president has been less supportive.” There will also likely be less offshore drilling on federal lands under Obama, it says, which could result in greater dependence on Canadian energy.
The risk to the repeal of Obama’s healthcare plan has also dissipated with his win, which should benefit pharmaceuticals, CIBC says, as well as care providers by lowering uninsured coverage costs.
Finally, for financial stocks, CIBC says that Obama’s win means that the implementation of the regulatory reform known as Dodd-Frank will proceed, whereas Romney had pledged to replace both it and the Sarbanes-Oxley legislation with a less onerous regulatory regime.
As for bonds, CIBC says that fixed income “could gain ground in the days ahead, given renewed risk-off sentiment as attention turns to the fiscal cliff.” It notes that a Romney win would have also raised the risk of of a more hawkish chief for the US Federal Reserve Board when current chairman, Ben Bernanke’s, term is up in February 2014. “Obama may appoint Yellen, or another dove, removing risks that a more hawkish Fed would see a sharper rise in interest rates slow the momentum in an eventual acceleration of economic growth,” CIBC says.