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U.S. Political Risk Could Cause A Recession Next Year: Bob Doll

Daily Ticker

Do party politics influence investors? Maybe -- maybe not. The S&P 500 (GSPC) has gained more than 62 percent since President Obama took office in 2009, and despite losses last week, the S&P is still up 11 percent year-to-date. Even with these advances, a majority of money managers and investment strategists would prefer a Republican president, according to a recent poll by CNNMoney. Seventy percent of those surveyed want a leadership change although markets have historically fared better during a Democratic administration.

For Bob Doll, chief equity strategist at BlackRock, the most important factor for markets right now is not necessarily who will win the White House but rather direction from Washington on budget and tax policies — regardless if it comes from a Democrat or Republican.

"Markets and business folk…hate the uncertainty of all these temporary measures," Doll says in an interview with The Daily Ticker. But "the probability is near zero that politicians will do anything meaningful before the election."

According to Doll, the probability of a recession in the U.S. increases in 2013 if Congress and the White House cannot agree on a sound fiscal policy that resolutely tackles both entitlement spending and the Bush-era tax cuts. U.S. political risk is a "wildcard" for his positive market outlook: Politicians should extend or re-design the Bush tax cuts that are set to expire in December because not doing so would have "significant negative effects for the U.S. economy and financial markets," he writes in a recent investor note. Doll says the scheduled $600 billion defense and domestic discretionary cuts that resulted from the bipartisan Super Committee's failure to reach a debt deal will also adversely impact stocks.

Congress and Obama are unlikely to reach a comprehensive compromise on key issues before the November election. Both parties are reluctant to address the nation's budget woes, with both Obama's budget and the bipartisan spending proposal written by Reps. Steve LaTourette and Jim Copper solidly rejected by Congress. Doll says the soon-to-expire payroll tax holiday and unemployment benefits pose another challenge to policy makers and ultimately the markets.

"I have to hope that politicians put policy ahead of politics at some point," he says. "We cannot solve our problem without addressing entitlements over the long term."