Cogita ante salis
Think Before You Leap
By Deborah DeMatteo
Managing Director & Chief Investment Officer
After an endless campaign with $553 million spent by President Obama and $360 million spent by Mitt Romney, we have re-elected our President to serve another four years. The markets immediately reacted shedding a total of over 2% for the week. We can finally focus on moving forward and gaining an understanding of what path we will follow toward a much hoped for and much awaited recovery. The unfortunate reality is that we have a tremendous amount of work to do, and time is of the essence.
Attention has turned immediately to the fiscal cliff debate. With a return of essentially the same players as before, fear has begun to set in that Washington will fail to arrive at any significant solution within the narrow window of time, putting the economy at great risk. With an equally divided voting population each party feels re-energized in their mandate from the people. I hear words and promise of compromise; however we need to remain skeptical that words will turn to results. This political “hot potato” will likely play itself out very vividly in the financial markets.
There is a risk that even if a deal is reached, the uncertainty that it will create over the next several weeks will keep businesses and households in the “wait and see” mode. With the economy growing at a rate of less than 2% a small tick down in economic activity could move the economy into recession very easily. Investors are therefore pricing in a growing probability of a recession, the impact of potentially higher taxes on income as well as dividends and capital gains, and what the real damage could be if Washington fails to reach an agreement before the end of the year. This will generate selling for several reasons. Many will choose to sell in tax year 2012 to take capital gains knowing what rate they will pay, causing what I would refer to as technical selling. Much more unpredictable will be the fear selling as investors move to the sidelines in anticipation of market turmoil. Once again in the background of all of this the European crisis has surfaced into the headlines once again as Greece needs another round of money.
The good news is that none of this is new! Although the headlines have changed, we have known for months that the election was largely a distraction to the bigger economic issues that need to be addressed. We at least know the dynamics of the debate based on how we voted. Volatility will likely return, but with money to invest volatility can spell opportunity.
Whether a deal is reached before December or after the first of the year, we will gain more clarity on what the economy will look like in 2013. The big question will be is there enough to get businesses to begin to hire and spend. Obama has agreed to meet with CEO’s to listen to their ideas and suggestions to get the economy moving. He will then begin discussions with Congress later this week. As both sides posture for position, Wall Street will try to predict the outcome.
We will continue to move to a more cautious position believing that the near term downside risk is greater than the upside reward. This will give us the privilege of rebuilding a portfolio reflective of a better understanding of the future.