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About half the country is disappointed in the election results, and slightly more are pleased by President Obama’s reelection. But almost everyone is relieved that the election is over — in fact, it appeared the market celebrated on Election Day when the Dow rose 133 points. However, stocks have reversed course sharply, as investors refocused on the year-end fiscal cliff, Europe’s debts and other concerns that had been temporarily overshadowed by the election.
Whether you’re elated or distressed by the election outcome, there are some investment decisions you may want to consider — and a few lessons to learn, too. The most important thing to remember is that it’s not a good idea to make emotional investment decisions based on your fears or excitement about the election or short-term market moves. Your financial future is more likely to be determined by your actions than the election results.
More of the Same — Divided Government Continues
Republicans control the House, and Democrats control the Senate, so the actual party in the White House may not have as big an impact as many people believe. Much of the gridlock is likely to continue. As a result, few of the promises made during the campaign will be passed into law. The country’s system of checks and balances has historically moderated extreme changes.
The two major policy trends we can expect over the next four years are:
However, many major issues were not resolved by the election, and the country remains fairly evenly divided politically. So expect the brinkmanship and partisan divisions to continue. At the same time, the underlying trends of slow but persistent economic and earnings growth also appear likely to continue, creating opportunities for investors who take a long-term view.
Focus Shifts to the Fiscal Cliff
Now that the election frenzy is over, the focus will almost surely shift to the possible fiscal cliff — the automatic tax increases and spending cuts that take effect at the end of the year if Congress fails to act. If you haven’t already reviewed your tax and financial situation, before the end of the year you may want to consider:
Estate tax exclusion –The impact of the reduction in the federal estate tax exclusion from more than $5 million to around $1 million
Tax diversification – You can achieve this through owning investments taxed in a variety of ways, which may help you address the possibility of higher tax rates on different types of income in the future.
Rebalance – Reduce any over-concentrated positions and rebalance back to your target investment mix
Review gains and losses – Reviewing gains and losses as part of your year-end tax planningAlthough most expect Congress will act to avoid the fiscal cliff, or at least reduce its impact, no one can be sure, and we think it’s prudent to prepare today.(1)
What Lessons Can Be Learned?
The election results were a major lesson in the fallacy of making decisions based on short-term predictions — they remind us of the reasons we avoid short-term investment predictions. But the election resolved some uncertainty, and that’s good news for investors, even with some short-term volatility going forward. Historically, stocks have gained an average of 4.4% during the final two months of presidential election years, so don’t let your reaction to the election keep you on the sidelines.(2) Just like the candidates, who are moving forward whether they won or lost, you need to review your financial goals and move forward with your investment portfolio designed to help you achieve them.
I hope you found this information helpful. If you have questions, please don’t hesitate to call or schedule an appointment.
With personal service,
Stephen L Gerrald, AAMS
Past performance of the markets is not a guarantee of future results.
1 Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
2 Ned Davis Research. Stock returns after elections include returns from November-December and are represented by the S&P 500 from 1926 to 2011. Stock returns since 1900 are represented by the Dow Jones Industrial Average. Further distribution prohibited without prior permission. Copyright 2012 © Ned Davis Research, Inc. All rights reserved.