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.

As 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.

This article can be found at: http://www.wellsfargoadvantagefunds.com/wfweb/wf/funds/commentaries/roundup_201211.jsp?blog_110712

This is a very well written article by Wells Fargo’s Chief Strategist about the fiscal cliff and how congress will react to it.  We strive to provide up to date and pertinent information to our readers.  Please take a look at this article.

What Will Congress Do About The Fiscal Cliff?

The U.S. economy faces a potential recession in 2013 if Congress does not take action to avoid the fiscal cliff. The Congressional Budget Office estimates that U.S. economic output could contract 0.5% in 2013, if all scheduled tax increases and spending cuts take place starting in early 2013. At this point, we do not expect this worst-case scenario to happen. Both parties favor avoiding the fiscal cliff. Of course, their proposals are different.

We have been saying for months that investors will probably not know how Congress will address the fiscal cliff until after the November elections. That’s because neither party knows whether their proposals will dominate the policy decisions. After all, the election will determine which party gains seats in Congress and controls the White House. Fortunately, the election is less than a week away. Therefore, investors may not have to wait much longer to get a clearer picture on how Congress is likely to deal with the pending tax hikes and spending cuts.

A recent Wall Street Journal/NBC news poll asked survey participants about how they would prefer Congressional Leaders to address the deficit problem. The responses suggest that the public is tired of a divided-ineffective government, with 75% of respondents saying that they would prefer that Congressional Leaders compromise over the deficit, while only 15% said that they want leaders to stick with their positions. This suggests that the newly-elected Congress has public support to find some middle ground and avoid going over the fiscal cliff. We don’t expect a wave of bi-partisanship to develop between the two major parties after the elections. But we could see a kind of detente between lawmakers as they address this serious and potentially damaging problem.

We believe there are three scenarios for the fiscal cliff. First, Congress could do nothing, allowing country to go over the cliff and causing a modest recession in 2013. We believe this is the least-likely scenario. Second, Congress could decide to just postpone the tax increases and spending cuts and move the fiscal cliff forward to be confronted in another year or two. This strategy would probably look irresponsible and could lead to a downgrade of the U.S. debt rating. The third and most likely scenario would be a compromise on tax hikes and spending cuts that limits the damage to the U.S. economy but dampens economic growth next year.

History shows that reducing the deficit would probably hurt the economy in the short run but would potentially create a healthier economic environment over the long term. Once the election is over, Congress will need to consider what the economy could endure from a compromise that raises some taxes and cuts some spending.

Congress will need to find an acceptable mix of taxes and spending that both parties can support. This will not be easy, and is unlikely to be done quickly. Nevertheless, investors should get a better idea about the direction that Congress will go soon after the election. If the Democrats retain the White House and control of the Senate, investors should expect proposals that would trade tax increases on wealthy taxpayers for smaller cuts in defense spending. If the Republicans win the White House and pick up more seats in Congress, then there is likely to be some temporary measure to avoid the fiscal cliff as the new Administration works on tax and spending reforms, not just changes to existing rates.

At this point, we believe that the uncertainty of the fiscal cliff could dampen economic activity early in 2013. However, after the fiscal cliff is addressed, we would expect economic momentum to build as the year progresses. For the year as a whole, we currently expect economic output to expand at an inflation-adjusted 2.5% rate in 2013. This would still be slightly less than the 2.8% thirty-year average. However, economic growth would probably be even better if the deficit was already reduced and the country did not face tax increases and spending cuts next year.

The approach of the fiscal cliff has been widely anticipated by businesses and investors. The uncertainty ahead of the fiscal cliff probably dampened business investment and hiring this year. If Congress takes action and avoids sending the country over the fiscal cliff, then companies may be more inclined to invest and hire again. Thus, concerns over the approaching fiscal cliff have already put strains on the U.S. economy. Congressional action to resolve the fiscal problems could open the door for a better economy next year. Congress just needs to get to work and avoid the political impasse that occurred during the debt-ceiling extension and U.S. debt downgrade in August of 2011.

The lack of action to address the fiscal cliff before the election was understandable. However, after the election, we expect investors to be less tolerant of further delays. Investors should know relatively soon if Congress is serious about avoiding the fiscal cliff.

Article can be found at: https://www.wellsfargoadvisors.com/market-economy/economic-market-reports/weekly-economic-analysis.htm