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Congressman Ryan, Capital Markets Impact

08/14/2012
During this past weekend Republican presidential candidate Mitt Romney selected Wisconsin Congressman and House Budget Committee Chairman Paul Ryan as his running mate. Much has been made, and will be made, regarding the selection. Most of what will be bantered will be fiction and potentially damaging to investors’ long-term portfolio strategies if they succumb to the rhetoric.
 
Within the past 24 hours I have witnessed many market analysts quickly become political analysts. Most are suggesting that the 2012 election will be solely focused on the upcoming “fiscal cliff” and entitlements. That suggestion might appear ominous to investors at first glance, especially reflecting back on the markets’ reaction to the deficit debate during the summer of 2011. It would be a mistake for investors to change their current portfolio strategies based on the fear of a contentious fall presidential election focused on the fiscal cliff and entitlements. 
 
Investors should not become political analysts with their portfolios. I made that mistake once.
 
In late August 2008, as I sat in the green room of the NASDAQ Market Site, 2008 Republican presidential candidate John McCain selected Sarah Palin as his running mate. I was very familiar with Governor Palin and her energy policies in Alaska based on my participation in the oil market. As I sat in the green room, Erin Burnett joined me and asked my opinion on the selection. I quickly became a political analyst; “It’s all about the price of oil,” I declared. In my view, Senator McCain, with his selection of Governor Palin, was declaring the 2008 election a vote on the direction of our energy policy. With the price of oil (Figure 1.1) hovering above $110 that day, I was confident in my assessment. How wrong I was! The unexpected unfolded in September 2008; oil prices collapsed, and the election had nothing to do with the price of oil.
 
I caution those that fear, or hope, that the selection of Congressman Ryan translates into a presidential election focused on the fiscal cliff and entitlements to think carefully about my own mistake. If this election were to be fiscal cliff-focused, I suspect the S&P 500® Index (SPX) (Figure 1.2) would have suffered a sharp correction on Monday instead of continuing to push toward a new 2012 high. Rather, I expect a presidential election in which the fiscal cliff and entitlements are among many important policy issues highlighted by the candidates and not the sole focus of the election. Not to mention, there is always the great unknown, and as happened in 2008, that can change the entire focus.
 
KEEP IN MIND…
 
1.  Prior to this weekend, the voter electorate has been surprisingly disengaged. Opinion polls with lackluster participation and television ratings at near-decade lows confirm that. Since the Saturday selection, there has been a modest increase in television ratings. I expect the selection has finally engaged the voter electorate; in essence, the race for the White House truly began on Saturday, August 11. An engaged electorate increases the possibility for “forced compromise” on fiscal cliff issues.
 
2.  Polls continue to provide evidence that, as the SPX appreciates higher, the likelihood for change, either in the White House or control of the Congress, is diminished.  
 
3.  Investors should avoid significant allocations to the defense and civilian aviation sectors as they are positioned to be most negatively impacted by a potential 2013 sequester enactment of automatic spending cuts
 
4.  Whether or not the reality of 2013 brings forth increases in dividend and income taxation, the uncertainty surrounding that outcome should pull forward capital allocation strategies into the fall of 2012. Investors should expect increased dividend payments and M&A transactions for the remainder of 2012.
 
5.  Florida, North Carolina, Virginia, Ohio, and now, with the selection of Congressman Ryan, Wisconsin are the states most likely to decide the outcome of the presidential election. Those battleground state polls are what investors should focus on, not the general election polls.  
 
6.  The role of the vice president appears more relevant than in recent elections as current polls suggest a potential 50-50 Senate split, leaving the vice president as the deciding vote.   
 
 
CALENDAR AHEAD
 
Monday, August 27, 2012             Republican National Convention begins in Tampa, Florida
Thursday, August 30, 2012           Republican National Convention concludes in Tampa, Florida
 
Monday, September 3, 2012         Democratic National Convention begins in Charlotte, North Carolina
Thursday, September 6, 2012       Democratic National Convention concludes in Charlotte, North Carolina
 
Wednesday, October 3, 2012        First presidential debate at University of Denver, Denver, CO
Thursday, October 11, 2012          Vice presidential debate at Centre College, Danville, KY
Tuesday, October 16, 2012           Second presidential debate at Hofstra University, Hempstead, NY
Monday, October 22, 2012            Third presidential debate at Lynn University, Boca Raton, FL
 
Tuesday, November 6, 2012           Election day
 
Friday, December 14, 2012           112th Congress adjourns
 
Tuesday, January 1, 2013              Bush tax cuts expire; the sequester’s automatic spending cuts begin and other benefit extensions cease (unemployment)
 
March 1, 2013                              Debt ceiling reached?
 
 
Figure 1.1 Crude Oil Price, 2008 Election

Source:  Bloomberg


Figure 1.2 S&P 500 Index (SPX), Year to Date

Source:  Bloomberg








 

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