Commentary on the election from Chief Portfolio Strategists at Wells Fargo.

The Lawhead Team came across an article written by the Chief Portfolio Strategist at Wells Fargo discussing the affect the election will have on our nation’s market.

The election was the beginning, not the end. By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Before the U.S. elections, Republicans controlled the House of Representatives, the Senate was narrowly controlled by the Democrats, and Obama was President. After the election, nothing has changed. It’s tempting to think that means the next few years will be similar to the last two years.  While it is possible, the strong showing by Mitt Romney in the presidential election and the prospect of further shake-ups in Congress in the 2014 mid-term election could force President Obama and congressional Republicans to inch towards compromising on budget issues.

In the 28 presidential elections since 1900 (excluding the current election), the Dow Jones Industrial Average increased 46% of the time the day after the election. When the Dow was down the day after the election, the Dow ended the year down a bit further 60% of the time. When the Dow was up the day after the election, it ended the year up further 85% of the time. In other words, the first day of trading seems to be a pretty accurate predictor of trading for the remainder of the year.

It’s really easy to say, “but it’s different!” Indeed, every election is different. This year, however, there is the eurozone debt crisis, the transition of leadership in China, and the U.S. fiscal cliff. These three issues could come to a head in the month of November, despite the conclusion of  the U.S. elections.

On Wednesday, November 7, the Greek Parliament is scheduled to vote on additional austerity measures, which could determine whether the Greek government receives another round of financing from its lenders. On November 25, there is a regional election in Catalonia, Spain. If the election goes well for Spanish Prime Minister Mariano Rajoy’s party, the Spanish government could ask for a bailout or conditional line of credit, which should assuage investors’ fears about the pain in Spain. On November 8, the 18th Party Congress of China will convene and we should see whether the leadership that is scheduled to take over in China in March 2013 will continue to make important political and economic reforms, or if it will be stacked with individuals who resist change.

On balance, It’s a global market and global politics matter, not just U.S. politics. However, many investors will likely pay close attention to the status of the U.S. fiscal cliff. The combination of tax increases and government spending cuts scheduled to occur as we enter 2013 have been referred to as the “fiscal cliff.” The expiration of the 2001-2003 tax cuts, the expiration of the two percentage point reduction in payroll taxes from 2010, the expiration of emergency unemployment insurance benefits, new health care reform taxes, cuts to doctors’ reimbursements under Medicare, and the budget sequester are all part of the fiscal cliff. But what could really push politicians into action is the alternative minimum tax (AMT).

Without congressional action, the AMT—which was originally enacted in 1969 to target 155 wealthy individuals—will likely saddle 30 million Americans with an additional tax burden they have probably never heard of. The AMT exemption levels were never indexed for inflation, so Congress regularly bumps up the exemption to keep inflation from capturing more and more people in the AMT net. However, congress has failed to make this normally regular adjustment, and will probably get an earful over Thanksgiving from constituents. This could likely push Congress and the president to act on the entire fiscal cliff, punting the problem into the next session of Congress.

ElectionAs part of the debt-ceiling debate of 2011, the president and Congress formed a “Super Committee” to develop budget cuts, but the Super Committee failed. Well, this time they’ll probably form a “Super-Duper Committee” to construct comprehensive tax reform. The 2014 mid-term election could  be like a voter-referendum on the nature of the reform.

Considering the continued uncertainty about politics, what could move the markets in 2013? The answer is “money.“ It’s no secret that businesses worldwide are holding piles of liquid assets. The money will be put into motion; it’s just a question of where the businesses will expand and seek out opportunity. That’s where a country’s fiscal and regulatory policy will be important to follow: Companies will invest to grow, but where will they do it? They’ll invest where they find a friendly environment, which is probably also where investors should be looking for investment opportunities.

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