* Result eases uncertainty on Fed, regulation
* Stocks could struggle early, bonds rise
By Rodrigo Campos and Steven C. Johnson
NEW YORK, Nov 7 Traders and investors on
Wednesday said the best way for U.S. President Barack Obama to
celebrate his re-election would be to avoid a budget crisis that
could send the U.S. economy reeling.
Stock futures fell about half a percent after Obama edged
out Republican Mitt Romney while bond futures rose. While the
result ended uncertainty about regulation and monetary policy,
some remained on edge about taxes and overall economic health.
Investors have had a tendency of downplaying problems
emanating from Washington, only to find themselves surprised
when lawmakers cannot get together on critical issues.
The $600 billion of automatic tax increases and spending
cuts that could take effect in January and send the fragile U.S.
economy into a tailspin is the next such issue that could
"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.
With Republicans retaining control of the U.S. House of
Representatives, some investors feared compromise on fiscal
reform would remain hard to come by, which could keep markets
Economists fear letting all the tax hikes and spending cuts
take effect at once would hammer consumer and business spending,
push the U.S. economy back into recession and batter markets.
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.
"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.
"Markets will have a knee jerk reaction tonight and tomorrow
and find support over the next few days," he said.
But Steven Englander, head of G10 foreign exchange strategy
at Citigroup, warned that the fiscal cliff "could become a
bigger issue down the road, and if we don't see progress quickly
the market may reconsider how risk-positive the next few months
That could hurt the U.S. dollar, should investors worldwide
think the U.S. deficit will drag on the economy. European
nations have been hamstrung by their inability to escape their
heavy debts and lackluster growth.
Though markets came into the night expecting Obama to win,
most traders and investors supported Romney, who raised more
money on Wall Street than Obama.
Whitney Tilson, a hedge fund manager and one of the only
managers in the $2 trillion industry to publicly endorse Obama
for a second term, said he was optimistic that the two parties
"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."
Billionaire investor George Soros, another outspoken Obama
backer, said he saw the result "opening the door for more
sensible politics. Hopefully, the Republicans in office will
make better partners in the coming years, most urgently in
avoiding the so-called fiscal cliff."
CLARITY ON THE FED, LESS ON THE ECONOMY
Obama's win did remove uncertainty about the future of
Federal Reserve policy.
Romney had said he would have replaced Fed Chairman Ben
Bernanke, whose dovish monetary policy has been a helped propel
the gains in both U.S. bond and stock prices in recent years.
"Obama wins and will keep Bernanke and therefore the risk
asset rally," said Tom Sowanick, co-president and chief
investment officer at Omnivest Group in Princeton, New Jersey.
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, meanwhile, hit record lows despite a
downgrade of the U.S. credit rating last year. Cumulative
returns for all maturities on all U.S. Treasuries are at 14
percent since Obama took office, according to Barclays.
"Net-net, I think the market will say, 'Well, we never were
that scared about the fiscal cliff anyway, and isn't it going to
be great to have Bernanke at the Fed for the foreseeable
future,'" said Michael Jones, chief investment officer at
Riverfront Investment Group, with $3 billion in assets under
Gregory Whiteley, government bond portfolio manager at
DoubleLine Capital in Los Angeles, said steady Fed policy could
spark a slight rally in bonds.
But he said the prospect of higher taxes, and stiffer market
regulation would likely keep growth sluggish.
"I don't think the result is good for economic growth, so
there wouldn't have been much upward pressure on yields from
that front," he said.
The U.S. economy has held up better than other advanced
economies, but growth has remained sluggish and unemployment
high. Economists expect about 2 percent growth this year.
Under a second Obama presidency, Wall Street will have to
forgo trying to repeal Dodd-Frank financial reforms and instead
continue to use their personal relationships in Washington to
keep the law from harming the 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
that 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.