Breakout

Obama Re-Elected! Now About That Fiscal Cliff…

Jeff Macke
Breakout

After all the speeches, debates, hype, anger, voting snafus and breathless coverage America finds itself right where it was prior to the election. The GOP kept control of the House, the Democrats have the Senate and President Obama retains the White House. Wall Street expected an Obama win and the initial reaction was muted overnight, though selling pressure started picking up during this morning.

David Lutz, managing director of head of ETF trading at Stifel Nicolaus, says the Street is just relieved to see a decisive outcome. "The market was really happy overnight that we didn't have any kind of scenario that we didn't know who our next President is going to be," he says in the attached clip. Now that America knows for sure, the financial world has to figure out what to do with the information.

Some ambivalence on Wall Street at the prospect of four more years is to be expected. Since the 2008 election the S&P 500 is up just over 50%. Annualized and unadjusted for inflation, the returns under Obama work out to just over 11% or almost exactly the same as the average gains for the broader market since 1969. The real positive for stocks under the President was less the numbers than the return of some semblance of stability to an economic system very much on the brink from 2007 to early 2009.

Stopping he economic bleeding was a triumph for the President but the cost of that stability was steep. The amount of stimulus and outright governmental manipulation of markets that created at least the illusion of an economic recovery has been unprecedented. Wall Street has been vilified, abused and generally blamed for every failure of policy for the last two decades. What hasn't happened is meaningful reform of the system. The country avoided a worst case scenario but the policies remain in crisis mode.

Speaking of crisis, attention has immediately turned to the Fiscal Cliff, a combination of mandatory tax hikes and spending cuts set to be put into place early next year. Lutz says the markets need less rhetoric and evidence of the GOP and Democrats working together. The political noise is to be expected but to investors prices are reality.

Related: Economic Shock From Fiscal Cliff Will Last Over a Decade: NAM

Lutz's preferred method of cutting through the fog is to watch the iShares Defense Contractor Index (ITA). If mandatory cuts to the defense budget are going to be rammed through as a function of the cliff, the ITA is going to tell us before Washington DC does.

Lutz isn't expecting what he calls a "grand deal" but he does think the real horse trading and bargaining is going to begin now that the election is settled. He thinks the Republicans are likely to give ground, bringing higher taxes into play, but both sides will give a little bit to push the deadline back, if not come to a real resolution prior to the December 31st unofficial deadline.

Investors overall would be more than happy with four more years of 11% gains and relative calm. Whether or not we get more of the same depends largely on the ability of our still divided officials ability to compromise. The fiscal cliff is less than two months away. If the President is going to bring the nation together and start rebuilding our economy the time to start is now.

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