Implications of the US Election

During the second quarter, Mitt Romney won enough delegates to lock up the Republican nomination for the US presidency, effectively signalling the start of the US presidential race. As we write this commentary, President Obama has a slight lead, but the election is still too close to call.  We do not profess to be smart enough to pick the winner, but we can discuss the implications of a democrat or republican victory.

If President Obama wins another four years in the White House, we can expect more of the same; a continued push for higher taxes, increased spending for social programs and increased regulatory oversight.  The success of his agenda becoming law will depend on the makeup of both the house and the senate.  We presume that if President Obama retains the Senate, he would still have to deal with a Republican majority in the House of Representatives.  This would lead to continued gridlock with little progress being made on deficit reduction.  Corporate spending would also be constrained due to the uncertainty related to future tax levels and regulations.  Which party controls the Senate remains a tossup, but it is unlikely significantly impact the balance of power in Washington.  If current spending patterns continue apace, further rating downgrades of US debt should be expected. The first rating cut last summer had minimal impact, but a second or third rating cut has the potential to damage the US economy.

On the other hand, a victory for Mr. Romney and his platform would be looked on more favourably by US investors.  Mr. Romney is talking about scaling back US government spending to levels that are closer to the historical norm of the last 50 years (see box on page 3).  While we are not certain that there would be a significant reduction in taxes, we are confident that there would be more certainty related to the level of taxation and regulations faced by companies.  Mr. Romney understands that US spending is pushing the cumulative debt load of the country to a level that is ultimately unsustainable.   Hard decisions need to be made now or the country will be faced with even more difficult choices in the future, akin to what Europe is currently facing.  If Mr. Romney is leading in the polls heading into the fall, stock markets are anticipated to react favourably to the perception of a changing of the guard.  If Mr. Romney wins the fall presidential election, supported by Republican majorities in the House and the Senate, he would be able to fulfill his promises.