Whatever the outcome of the U.S. election, the economy and the markets are likely to face more uncertainty, not less, over the coming year.
Here comes more uncertainty.
It may sound counterintuitive, but whatever the outcome of the
U.S. election -- whether President Barack Obama or Mitt Romney wins -
- the economy and the markets are likely to face more uncertainty,
not less, over the coming year.
"Uncertainty" has become the watchword over the past several
years for many chief executives, politicians and economists as an
explanation -- or perhaps an excuse -- for the U.S. economy's slow
growth, for the lack of hiring by businesses and for the volatility
in the stock market.
"The claim is that businesses and households are uncertain about
future taxes, spending levels, regulations, health care reform and
interest rates. In turn, this uncertainty leads them to postpone
spending on investment and consumption goods and to slow hiring,
impeding the recovery," a group of professors from Stanford
University in California and the University of Chicago wrote in a
study that found "current levels of economic policy uncertainty are
at extremely elevated levels compared to recent history." (The
professors have created a Web site, policy uncertainty.com, where
"uncertainty" levels can be tracked.)
Come Wednesday, we should know who the president will be.
But uncertainty hardly ends there.
Almost immediately after the elections, the next big talking
point on Wall Street and in Washington is going to be the now
notorious "fiscal cliff," a series of automatic tax increases and
spending cuts that was the result of a congressional compromise
reached last summer and is to take effect Jan. 1 unless Congress
finds an alternative. Already, executives say that the uncertainty
about the outcome of negotiations over the fiscal cliff is causing
them to hold back from making new investments.
But the greatest likelihood is that the fiscal cliff is not going
to be resolved soon at all -- the betting line among the political
cognoscenti is that no matter who wins, Congress will find a way to
kick the issue down the road, perhaps as far as the autumn of 2013,
providing a new cloud of uncertainty over the economy.
For investors, the fiscal cliff includes increases in taxes on
dividends (making them the equivalent of ordinary income, on which
rates could rise to as high as 39.6 percent) and capital gains (to
20 percent, from 15 percent). In a note to clients Sunday night,
Goldman Sachs said that it expected the rate for both dividends and
capital gains to be negotiated to 20 percent in either a second
Obama term or a Romney presidency. But more important, Goldman noted
that when similar tax increases were on the table in 1970 and 1986,
"the S.&P. 500 posted negative returns in the December prior to
implementation as investors locked in the lower rate." December, the
report said, "has the second-highest average monthly return" since
1928.
Many investors have already begun selling stocks and companies in
anticipation of tax increases. Speculation was rampant last week
that one of the reasons for the timing of the sale of Lucasfilm, the
company of the "Star Wars" creator George Lucas, to Disney for $4.1
billion in cash and stock was impending changes in tax policy. (Mr.
Lucas has said that he plans to donate a majority of his wealth to
charity.)
Once we get past the fiscal cliff -- if we do at all -- there is
Europe. The issues in Greece and Spain have not gone away, and
some economists argue that things have gotten worse. Angela Merkel,
the chancellor of Germany, who will face election in 2013, said
Monday that the fiscal crisis in Europe was likely to last at least
five years. "Whoever thinks this can be fixed in one or two years is
wrong," she said.
And don't forget the Middle East. That "uncertainty" for the
world -- and the global economy -- is not going away anytime soon
either. Questions about a possible attack on Iran will persist under
either candidate.
And finally, there is Ben S. Bernanke, chairman of the Federal
Reserve, one of the biggest uncertainties of them all. As I reported
two weeks ago, the greatest likelihood is that Mr. Bernanke will
step down at the end of his term in early 2014, no matter who wins
the election.
It is possible -- though unlikely -- that his departure could
happen even sooner, if Mr. Romney wins. Over the next year and a
half, questions about Mr. Bernanke's future as the Fed chairman will
feed a sense of uncertainty among investors who have become
accustomed to his easy-money policies. If Mr. Obama wins, he is
likely to appoint a successor to Mr. Bernanke who is inclined to
keep interest rates low, with less concern for the possibility of
inflation -- and more likely to keep printing money, as Mr. Bernanke
has, a strategy that comes with its own risks. If Mr. Romney wins,
he may appoint a chairman who is more inclined to try to limit
inflation, which could create a different sense of uncertainty about
how the Federal Reserve will unwind itself from Mr. Bernanke's
policies.
None of those issues are new. Mr. Obama took office facing a
fiscal policy dispute that would not be settled, and probably could
not have been, given the gridlock in Congress. No solution is in
sight for Europe's problems. Tension in the Middle East is rising as
fast as nuclear technology. And the Fed's monetary policy is at its
most opaque since the Reagan administration.
All of which shows that the comedian Jon Stewart is more on
target than ever with the cheeky title of his election coverage on
"The Daily Show" on Comedy Central. Carrying on a tradition, it is
known as "Indecision 2012."
Update that to 2013, and it is good for another year.
