As more and more polls tip further and further in Barack Obama’s favor, many on Wall Street are already starting to advise their clients about how to prepare for an Obama victory.
The biggest thing worrying investment firms and hedge funds isn’t the fact that Obama might raise taxes on the highest earners in the aftermath of his re-election. They’re more worried about the fiscal cliff.
If nothing is done by Congress, on January 1, $600 billion in painful across-the-board spending cuts and the expiration of Bush-era tax breaks could do some serious damage to an already ailing economy.
Given last year’s budget battle, which led to one of the world’s top credit rating agencies downgrading U.S. credit, Wall Street is understandably nervous about a repeat. However, they feel that if Obama was re-elected, the political posturing of the last few years could ease.
This would make it more likely that House Republicans would be willing to cut a deal with Obama to avoid some of the painful tax increases and spending cuts set to be implemented at the beginning of next year. Many investors — as well as the Congressional Budget Office — view the consequences of going over the fiscal cliff as so dire that they believe it’s more a matter of when, not if, a deal gets done.
They’re hopeful that a conversation will start — assuming Obama is re-elected and Congress remains split with the Democrats controlling the Senate and Republicans the House — some time in late November, during the so-called lame duck session. There is a good chance that these negotiations could be painful and lead to market issues similar to those seen during the debt ceiling fight.
However, the short-term pain from those negotiations would be much better than the long-term consequences of going over the fiscal cliff — a shrinking economy and increased unemployment. There is also reason to believe that a sharp decline in the stock market over the negotiations could help push Congress and Obama to cut a deal.
For now, though, we’ll just have to wait and see how the November elections pan out.
– Benjamin Nanamaker, InvestorPolitics Editor
The opinions contained in this column are solely those of the writer.
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