PACT
On The Market
By Gabriel Potter, MBA
E
very four years, the US electorate gets the
opportunity for a fresh start. On Election Day,
Americans had a chance to review their instructions
and the chance to replace the policy makers in Washington.
On the surface, the status quo has been essentially
maintained, but the interpretation of these results informs
the base-case scenario of US policy.
The Good News
As a rule, markets hate uncertainty. At a basic level,
uncertainty is what investors suffer through to warrant a
return on their investment. Second, it’s hard to derive a
logical price for a security if the inputs to a pricing model
(e.g. tax rates or projections for GDP growth) are unstable.
The good news is that some elements of US policy became
much more certain on November 7th.
Broadly speaking, the government’s effect on the economy
is primarily a function of monetary policy (i.e. how much
money is in circulation) and fiscal policy (taxes and
spending). As a result of the election, there is substantially
more clarity on the direction for US monetary policy.
Monetary policy is driven by competing desires for stable
prices (i.e. controlling inflation) and high employment.
Our current Federal Reserve Chief, Ben Bernanke, has
signaled that he will stand down in 2014, but since the reelection of the President, it is likely the accommodative
policies will continue. In addition, there is consensus
his replacement will most likely be current Federal Open
Market Committee member, Janet Yellen. Mrs. Yellen has
already indicated comfort with the existing zero interest
rate policy, so long as inflation remains below 3%, and
unemployment remains above 7%. In other words, the
“dovish” monetary policy — accepting higher inflation in
an attempt to maximize employment, is a probable policy
target for the near to medium term.
Given the re-election of President Obama, legislative
milestones which would have been threatened under
Romney’s administration now appear stable. As the
Republican candidate, Mitt Romney vowed to undo the
Affordable Care Act (i.e. “Obamacare”), but the law itself
will likely stand unchanged for the near future, despite
state driven challenges to implementation.
On a related note, challenges to the Wall Street Reform
and Consumer Protection Act (i.e. “Dodd-Frank”) may
be only marginal. This broad reaching legislation was
drafted without specific detail, so full implementation and
analysis of its effects will take time. For example, the law
authorizes the SEC to impose “fiduciary duty” standards by
broker-dealers to their customers, but the precise language
surrounding this instruction has not yet been drafted.
Nevertheless, the law itself should persevere without the
threat of repeal.
There are elements to US policy which, following the
Presidential debates and other expressions, were not
subject to material change no matter who became President
or which political party dominated Congress. For example,
many pundits noted key positions on international policy,
such as free trade agreements and guidelines for armed
intervention at global hotspots like Syria and Iran, were
largely similar between President Obama and Governor
Romney.
Partisans often frame a political choice as a binary
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