Move along, folks. Nothing to see here. The re-election of President Barack Obama presents the prospect of no change to US economic policy – or to market sentiment. True, investors have been spared the scattergun policy approach of a Romney administration – including a possible trade war with China over its currency, or the sidelining of US Federal Reserve chairman Ben Bernanke. As for four more years for Mr Obama, tomorrow’s policy gridlock will look much like yesterday’s.Investors’ immediate focus will be on the so-called fiscal cliff. Under this scenario, $600bn of tax rises and spending cuts are due to take effect in 2013 unless Congress acts to prevent that from happening. While investors wait for Congress to get its act together, there are other factors to consider.
One is to pick the sector most likely to benefit from Mr Obama’s re-election. How about banks? The sector has been the administration’s whipping boy from the outset: he became president just a couple of months after the collapse of Lehman Brothers. The intrusive regulation that followed is unlikely to be watered down. But assume the anti-banker rhetoric ends now. The administration has essentially won its argument with the banks over regulation and practices. US banks are in much better shape than their European counterparts. A truce between Wall Street and the White House is desirable, and a buy signal.
The other scenario is negative for some investors. A special tax rate of 15 per cent on dividends, introduced by the Bush administration and extended after the financial crisis, expires with the fiscal cliff package. Dividends will again be taxed at almost 40 per cent. In the past year, total cash dividends paid by S&P 500 companies rose 18 per cent, the biggest increase in at least 20 years, according to Standard & Poor’s. Talk about a party pooper.