Obama win has U.S. investors staring at fiscal cliff

NEW YORK Wed Nov 7, 2012 3:18am EST

1 of 4. Supporters of U.S. President Barack Obama cheer during his election night rally in Chicago, November 6, 2012.

Credit: Reuters/Philip Scott-Andrews

Related Topics

NEW YORK (Reuters) - U.S. investors will hit trading floors this morning with the same president and the same problems in gridlocked Washington. First up: a looming budget crisis that could send the U.S. economy reeling.

President Barack Obama beat back Republican challenger Mitt Romney to win a second term, but he will still have to contend with a Republican-controlled House of Representatives that could make forging a compromise on pressing issues like the coming "fiscal cliff" difficult.

"There will be an immediate shift to government gridlock and the fiscal cliff issue, and that will be a headwind for stocks," said Michael Yoshikami, chief executive officer and founder of Destination Wealth Management in Walnut Creek, California.

The fiscal cliff is a $600 billion package of automatic tax increases and spending cuts, scheduled to take effect at the end of 2012, that could severely strain economic growth.

Obama is expected to demand tax increases for the wealthy as part of a deal to reduce spending to tackle the nation's deficit. Many investors thought that Romney as president-elect would have had a smoother time in negotiations.

"The real challenge is for (Obama) to bridge the differences with Congress and work to get in the middle," said Jason Ader, a former Wall Street gaming analyst and a Romney supporter.

Steven Englander, Citigroup's head of G10 foreign exchange strategy, said markets could panic toward yearend if it looks as though no deal is imminent to avoid the fiscal cliff.

If that happens, investors will think twice about lending the U.S. government money at low interest rates, which would strain the economy, widen the deficit and hurt the dollar. It also raises the possibility that major credit-rating agencies will cut the U.S. debt rating.

Standard & Poor's stripped the U.S. of its pristine triple-A rating in 2011; the agencies have said they will evaluate budget negotiations and solutions and may take action next year.

Investors have had a tendency to downplay problems emanating from Washington only to find themselves surprised when lawmakers cannot get together on critical issues. The market reacted harshly to Washington gridlock after failed legislation to backstop the banks in 2008 and again during protracted talks to raise the U.S. debt ceiling in 2011.

Whitney Tilson, a hedge fund manager and one of the only managers in the $2 trillion industry publicly to endorse Obama for a second term, said he was optimistic that the two parties would compromise.

"This was a victory for moderates," he said. "I hope both parties recognize this and move toward each other - to the center - to address the pressing problems our country faces."

The end of the drawn-out election campaign puts to rest questions about regulation and monetary policy - Romney had said he would replace Federal Reserve Chairman Ben Bernanke - but some investors remained on edge about taxes and overall economic health.

Billionaire investor George Soros said late Tuesday that the re-election of Obama will open "the door for more sensible politics." Soros, a major contributor to Democratic causes, said in an email exchange with Reuters that he hoped "the Republicans in office will make better partners in the coming years.

CLARITY ON THE FED, LESS ON THE ECONOMY

Although markets came into the night expecting Obama to win, most traders and investors supported Romney, who raised more money on Wall Street than the incumbent.

Obama's win did remove uncertainty about the future of Fed policy. Romney had said he would replace Bernanke, whose dovish monetary policy has helped propel gains in both U.S. bond and stock prices in recent years.

The benchmark S&P 500 has rallied 67 percent since Obama took office - one of the most impressive runs ever for stocks under a single president.

Benchmark bond yields hit record lows despite a downgrade of the U.S. credit rating last year. Cumulative returns for maturities on all U.S. Treasuries are at 14 percent since Obama took office, according to Barclays.

The Fed's easy-money policy has pushed down the value of the dollar, though, and some worry more dollar weakness may be in store, particularly if investors see signs of rising inflation.

"The market rewards this certainty by bidding up gold and selling the dollar against all major currencies," said Axel Merk, president of Merk Investments in Palo Alto, California.

Under a second Obama presidency, Wall Street will have to forgo trying to repeal Dodd-Frank financial reforms and instead continue to use personal relationships in Washington to keep the law from harming firms, said Karen Shaw Petrou of Federal Financial Analytics, a Washington-based research firm.

Wall Street has bristled at the reforms, which include stricter capital requirements for banks, and the Volcker Rule, which is intended to stop banks from making bets in the financial markets with insured deposits.

But some welcomed the changes.

"I don't think any reasonable observer would want to go back to the risk that we had in the system before the financial crisis," said Evercore CEO Ralph Schlosstein.

(This story was refiled to restore punctuation in headline)

(Additional reporting by Tim McLaughlin and Svea Herbst-Bayliss in Boston, Atossa Abrahamian, Daniel Bases, David Henry, Rick Rothacker, Ryan Vlastelica, Sam Forgione, Nadia Damouni, Gregory Roumeliotis and Jennifer Ablan in New York; Editing by David Gaffen, Lisa Von Ahn, Prudence Crowther, Andrew Hay, Leslie Gevirtz and Ciro Scotti)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (11)
Numb3rTech wrote:
We are not staring at a fiscal cliff, we are going to go over it now.

Nov 07, 2012 2:21am EST  --  Report as abuse
Numb3rTech wrote:
I will be watching the unemployment numbers now that Mr. President Obama won a second term. I wish to see if companies now start down-sizing like they said they would have to do, if Mr. President Obama won.

It will take something Mr. President Obama has not done before in his first term of presidency to accomplish this. It will take bringing people together instead of dividing them and extreme bi-partisanship, both qualities of which he has been sorely lacking.

I wish Mr. President Obama a very successful 2nd term so the United States will better for all.

Nov 07, 2012 3:46am EST  --  Report as abuse
ArghONaught wrote:
Everyone should call their GOP partisan and tell them enough, and to get on with running the country not playing games. Oh yes, you had your chances today and blew it.

Nov 07, 2012 4:54am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.