How an Obama Win Affects Investments

Now that U.S. President Barack Obama has secured a second term, how will his win affect your investments?

In terms of monetary policy, U.S. Federal Reserve Chairman Ben Bernanke's "grand experiment" with quantitative easing will continue at least until Bernanke's second term expires in 2014. We can expect the Fed to continue to expand its balance sheet through asset purchases-primarily mortgage backed bonds- and to keep overnight interest rates near zero.

The Fed currently expects GDP growth of 3% in 2013. Unemployment is expected to continue to decline through 2013 but the unemployment rate may move in fits and starts as more discouraged workers move back into the labor force as conditions improve.

Unless there is an unexpected improvement in the employment situation and housing prices, investors can expect quantitative easing and zero interest rates to remain in place through 2013.

Here are the other ways a President Obama win will affect your investments.

How an Obama Win Affects Yields, Interest Rates and Dividends

Some investors have argued that the aggressive expansion of the Fed's balance sheet is inflationary.

So far, that has not been the case because the velocity of money has slowed as the private sector, both consumers and corporations have cut back on debt. If we can assume that public sector borrowing will be reduced starting in 2013 through some sort of compromise involving both spending cuts and tax increases, the velocity of money will be further reduced and inflation held in check.

There is no reason to think that Treasury yields will be significantly different at the end of 2013 than they are today. The Fed's zero interest rate policy means that yields can't go any lower and the combination of deficit reduction and the declining velocity of money should prevent yields and interest rates from moving higher.

Investors should be aware that there has been a lot of talk about raising the tax rate on dividends from the current 15% to anywhere between 18.8% and 43.4%. At the very least, a 3.8% surcharge will be added to dividends paid to high income earners. If dividend income is taxed at marginal tax rates, as high as 39.6% for the wealthiest taxpayers, the total tax rate could be 43.4% with the 3.8% surcharge. In this case, high-yielding stocks, such as utilities, may be sold off until higher dividend yields reflect the higher tax rates.

How an Obama Win Affects Stocks, U.S. Dollar

The combination of policies outlined above is likely to mean that much of the excess cash being generated by the Fed will find its way into stocks and hard commodities.

With interest rates remaining at zero and bond yields unchanged, investors will hunt for equity returns.

Demand for commodities should rise as economic activity gathers momentum through 2013. Increased manufacturing and construction activity should boost demand for metals, lumber and other industrial goods as well as energy. Just as in 2012, abundant money will be chasing scarce commodities.

Finally, the sum of the policies outlined above means that the U.S. dollar is likely to remain weak against most major currencies, barring an implosion of the euro. The continuation of the Fed's quantitative easing policies and the ongoing decline of the velocity of money will continue to force global interest rates to converge on zero. Under these circumstances, there will be even fewer carry trade opportunities in the currency markets leaving exchange rates more open to exogenous shocks.

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In sum, the markets in 2013 could look a lot like the markets in 2012, but things are not quite so clear cut on the fiscal side of the equation.

What to Expect on the Fiscal Cliff

Now that the election is behind us, leaving a divided government in its wake, the resolution of the fiscal cliff will be front and center and the clock is ticking.

Republican House Speaker John Boehner, who seems likely to retain his post next year, issued a statement this morning scheduling a statement for 3:30 pm "...on the fiscal cliff and the need for both parties to find common ground and take steps together to help our economy grow and create jobs, which is critical to solving our debt."

As he indicated in a CNN interview yesterday, Boehner is looking for a short-term "bridge" to get over the automatic spending cuts and tax increases that will go into effect on January 1, 2013 if nothing is done. While some close House races remain undecided, the Republican Tea Party caucus lost a number of members in yesterday's election, which may give Boehner more room for compromise when the new members are seated.

If the fiscal cliff can be sidestepped-a big if given that the lame duck Congress remains ideologically rigid-the debate over spending cuts and tax revenue can be expected to dominate the political agenda for the first three to six months of 2013.

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