Wednesday, November 7, 2012

Post-Election Battle

From the Desk of Erin D. Eiras, F.A.

November 7, 2012

Dear Valued Investor,

After hundreds of hours of debates by various candidates, well over a billion dollars spent on political attack ads, and a seemingly endless barrage of news coverage, the 2012 election battle is finally over. Now the fighting really begins.

The hard-fought election will likely be followed by more fighting in a divisive and bitter “lame duck” session in Congress that runs from November 13 through year-end. The stakes are high as those on Capitol Hill seek to mitigate the budget bombshell of tax increases and spending cuts, known as the fiscal cliff, due to hit on January 1. The two parties have very different visions of what a deal should look like. Failure to reach a compromise in the coming weeks could lead to a recession and bear market for stocks in early 2013.

However, a deal is in the best interest of those on Capitol Hill. The Republicans have a lot of items to lose that are important to them in foregoing a deal with Democrats: the Bush tax cuts would expire and the looming spending cuts hit defense spending hard while not really impacting the big entitlement programs (such as Social Security, Medicare, Medicaid, and Affordable Care Act). To avoid being blamed for a return to recession on their watch, Democrats may only need to compromise on extending the middle-class tax cuts, which President Obama already communicated his support of during his campaign, and delaying the impact of some of the spending cuts.

While a deal may be likely, there are risks for investors. With the S&P 500 having risen back to within 10% of all-time highs in October, markets seem confident that the Senate Democrats will quickly find a compromise with House Republicans to avoid going over the fiscal cliff. However, a compromise may be hard to reach. Recall that the gridlock in Washington was no help to markets in 2011, as the unwillingness to compromise on both sides of the aisle led to the debt ceiling debacle last August, which sent the S&P 500 down over 10% in a few days despite the ultimate approval of the increase to the debt ceiling.

Despite the risks, there is room for guarded optimism. If there ever were a time to enact long-term fiscal discipline, now is that time. The United States’ large and unsustainable budget deficits helped push total U.S. debt over 100% of GDP in 2012. Previously unmentionable as part of the “third-rail” of politics, wide-reaching bipartisan proposals have been unveiled to put the United States back on a path to fiscal sustainability. A long-term solution of permanent changes to tax rates and entitlement programs as well as ending the battles over the debt ceiling could emerge in 2013. This would be welcomed by the markets and lift the uncertainty plaguing business leaders and investors alike. 
The battle is likely to result in a compromise that averts the worst case outcome, but the negotiations themselves, coming on the heels of hard-fought election battles, may drive market swings in the days and weeks ahead. Fortunately, the lowest valuations for stocks in 20 years may help to limit downside and create potential investment opportunities.

As always, I encourage you to contact me if you have questions.

Best regards,

Erin D. Eiras

Wealth Manager / Financial Advisor

Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Standard & Poor’s 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This research material has been prepared by LPL Financial.

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