The key issue for the markets in the near term is economic policy, not tax policy. Tax policy is important in the long run for issues such as savings rate, capital formation, productivity growth, etc. But those are true long-term issues that are somewhat irrelevant in the short term for an economy that is deleveraging. In the short term, what’s more important is fiscal and monetary policy.
From that standpoint, I would argue that the level of uncertainty in the market has actually gone down, not up, after the elections. Here is my reasoning:
The fiscal cliff notwithstanding, there is no appetite for increased fiscal spending. That is the case for an Obama administration and in all likelihood would have been the case with a Romney administration. If anything, an Obama administration will probably lead to a lower level of fiscal consolidation. But a fiscal consolidation is what the country wants and that is what we are going to get, irrespective of whether it is good economic policy or not.
Thus, the burden of supporting the economy through the current deleveraging process rests entirely on the Federal Reserve and its easy monetary policy. The election ensures that this support will continue and, if anything, further support will be added through new housing initiatives. Bernanke and his current caucus in the Federal Open Market Committee will have the opportunity to see it through 2014, and their low-for-long policy has more credence for the marketplace. When he retires, either Janet Yellen or another dove will carry the mantle further. The fact that this scenario is more likely now to play itself out makes me far more optimistic for the next six or 12 months than any other drama that plays itself out in Congress. I am long risk and keeping it. And if it looks like the fiscal cliff may get resolved, I am going to add more risk.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments