While I consider myself an independent with a rational viewpoint, conservative on fiscal issues and more moderate on social ones, this election showed just how polarized our country has become. While the electoral vote was fairly one sided in favor of President Obama, the popular vote was much closer. In the end nothing really changed - we have a Republican controlled House, a Democrat controlled Senate, and a Democratic President; same as it was on Tuesday morning. Voters in general - regardless of party - just aren't happy with the way things are going in Washington.
There seems to be a notion that the markets declined this week because of the election results - a pure play between Obama and Romney's differing viewpoints on how to handle things - and the markets wanted Romney to win. However, the economy, while definitely important, wasn't the main factor in this election. Social issues, taxes, entitlement programs, the middle class, and foreign policy were also big components in the outcome. The ideals of the country are changing and this may have an impact on how markets act in the future as well as how business leaders run their companies.
I am sure the Democratic leaders in both the House and Senate have to believe the election results are a mandate to raise taxes on the rich or at least close some loopholes. With the Republicans in the House firmly against this, it seems that compromise is out of the question in the near term. It's likely the markets are going to have to get panicky before a real deal gets done, similar to the bailout in the fall of 2008. Unfortunately, I am not optimistic that a compromise will be reached by the end of the year. I think an agreement will be reached but not until the new Congress comes into office in January. Of course, it will take several weeks for some bill to be passed after new sessions begin.
Taxes are likely going up to some degree and this is probably going to happen at exactly the wrong time. Higher taxes of any kind in 2013 will most likely bring a US recession as the economy is just not growing fast enough. At the same time, the cost of food and fuel will likely rise as central banks print more money to try to prevent the downturn. This combination could bring about stagflation (inflation rises and growth slows) which is the least favorable type of investing environment. Time to error on the side of being cautious. The next few months are going to be interesting times indeed.
