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It’s a tight race to the White House, if media reports are anything to believe. But who actually sits in the Oval Office come January 2013 may have varying outcomes for the U.S. economy, the fiscal cliff (the expiry of the Bush tax cuts) and the debt ceiling (currently at $16 trillion).
Karthik Ramanathan, senior vice-president and director of bonds with Pyramis Global Advisors, shared his thoughts—and he made it clear that these were his opinions—at the firm’s fall forum, held last week in Toronto.
Romney, Obama, Obama plus
For Ramanathan, a Romney win could mean an extension of the fiscal cliff and a debt ceiling increase. Romney has expressed his dissatisfaction with the current federal policy and could replace Federal Open Market Committee Chair Ben Bernanke with a more “hawkish” individual, Ramanathan said. As a result, interest rates could increase from their current levels, and, with the perception that Romney has a stronger pro-business focus, equity markets could also rise, he explained.
With an Obama win, the impacts of the fiscal cliff (composed of $3 trillion of tax increases and $1 trillion in spending cuts) would likely also be deferred into 2013, but he may allow some portion of this law to proceed including tax increases for those individuals earning more than $250,000 per year, Ramanathan explained. Tax increases may not bode well for equity markets, but rates could remain stable as the fiscal situation began to stabilize through increased revenues, he said.
A best-case scenario could potentially lead to some type of “grand bargain” between the Democrats and the Republicans, though this would most likely occur in the second half of 2013, said Ramanathan. But, since such a bargain would be a long, onerous process—and include a potentially heated debate over raising the debt ceiling—the impact on equity markets could be negative until an agreement is reached, he continued. Such an environment could lead to Treasury rates to remain in their current range, as well as investors to wait and see if the two parties could come to agreement, Ramanathan explained.
But there is another scenario: an Obama win with no delay of the fiscal cliff, no debt ceiling increase, and no measure of bipartisanship. As Ramanathan sees it, it is highly likely that the U.S. credit rating would get a downgrade from its current AAA rating by Moody’s and Fitch, and there would likely be a negative impact on equity markets as there is plenty of uncertainty in the financial markets.
Wild card
However, Ramanathan said there’s a wild card in all of this: Hurricane Sandy. With last week’s hurricane hitting New York and parts of the eastern seaboard, could the new Congress agree to delay the fiscal cliff and remove any uncertainty due to the negative impact on the economy by the superstorm? Going over the fiscal cliff would only exacerbate any resultant GDP slow growth. The new president would likely have the opportunity to immediately delay the bulk of the tax revenues and spending cuts until 2013, he said.
In the end, Ramanathan said that whoever ends up taking office will be focused on the U.S.’s fiscal situation and potentially look at tax reform as a way to reach bipartisan agreement. And focusing on tax reform, said Ramanathan, will bode well for the U.S.
The potential for addressing the finances of the U.S. after so many years of neglect could energize investors who have generally had low expectations of change. And, in such a situation, there could be a positive impact on both bond and equity markets.