No President since Roosevelt has won with unemployment this high. The fact that the number of people out of work has been falling has clearly helped. However, there may also have been some recognition that it takes time for an economy to recover after a major banking crisis. As I noted in a recent Bloomberg interview, “the US is performing right in line with the past experience of economies emerging from a financial crisis” and whilst it might have done better, it was not clear that Romney offered an alternative to offset the powerful headwind from bank and household de-leveraging.

It was a clear victory for the President who won 303 electoral votes to Mr Romney’s 206 (with Florida still to declare). Wins were secured in a series of key states in the northeast, but it was victory in the key swing state of Ohio where many will argue the election was won. He retained Pennsylvania, a Democrat stronghold for many years and early signs signal triumph in Florida, which seems to have leaned in the president’s favour.

As predicted, the Democrats have maintained control of the Senate, which they have held since 2007, and the Republicans have retained control of the House of Representatives. The status quo prevails and the issue now is whether there will be enough common ground for Republicans and Democrats to reach an agreement on the fiscal cliff, the $600 billion of tightening scheduled to hit the economy in the New Year.

Meanwhile, one beneficiary of the result will be Federal Reserve chairman Ben Bernanke who will have the continued support of the President, rather than face the task of working with someone who has already announced he will not renew his term of office. From this perspective, markets can relax as money printing (QE) is set to continue.

On the fiscal cliff, the early signs are mixed. House Republicans have already said they do not see the election as a mandate for raising taxes. However, Obama’s victory speech seemed to be reaching for unity.

It remains our view that a compromise will emerge as neither side wants to be blamed for plunging the economy back into recession. Furthermore, there does seem to be a general agreement on extending the Bush tax cuts (which represent more than $200 billion of the fiscal cliff). The difference being that Obama would not extend the cuts to the wealthy, resulting in an extra fiscal tightening of around 0.5% GDP.

It is not just the scale, but the detail of the fiscal package that will be important. Uncertainty over the tax code may be a factor behind the fall in corporate capital expenditure in the US, and businesses will be looking for clarity if they are to resume spending. Equity investors will also be keen to see how proposals to increase dividend and capital gains taxes from 15% to 43.4% and 23.8% respectively play out.

The difficulty is that time is limited, with an agreement needed in the short six-week post-election period before year end. Given what we have seen in the past and in Europe today, politicians will want to take any agreement to the wire.

Keith Wade, Chief Economist & Strategist
Schroders Quickview
7 November 2012

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