Same players, same problems
According to the Center for Responsive Politics, $6 billion dollars were spent on the elections and yet, the status quo remains the same. So where do we go from here?
For investors, it is indeed a scary time because the focus for the country and the world for the next seven weeks will be on the fiscal cliff. I envision one of three outcomes: Congress and the President can adopt a Bowles-Simpson Commission compromise; kick the can down the road eight months into 2013; or do nothing and let the country go off the fiscal cliff.
Difficult to think the first scenario will happen based on how poorly Congress has worked with the President over the past two years. Instead, postponing any decision seems like the most likely outcome because it is the easiest thing to do. If nothing is done, the stock market will collapse and the bond market will rally to new highs and historic low yields. Can Congress be that stupid to let this actually happen, with an approval rating of just 9 percent?
The day after the election, I was fortunate enough to hear what two Republican congressmen and one Democratic congressman from Colorado had to say about the fiscal cliff. All three promised to go back to Washington and work together to get something done during the lame duck session. Obviously these optimistic declarations were met with extreme skepticism. The 313-point drop in the Dow the day after the election was certainly a warning shot across the bow. Think of it as a loud signal that if our political leaders do nothing, the markets will react very badly – similar to what happened during the debt ceiling fiasco in the summer of 2011 or when the first TARP package failed in the fall of 2008.
The good news in all this fiscal cliff turmoil is that interest rates will stay at historic low levels for no other reason than investors are scared to invest their money in riskier assets such as stocks. If you need to refinance your mortgage or are looking to buy a home, now is the perfect time to lock in a mortgage rate. These low rates have lifted the housing market, particularly in Colorado, where the lack of inventory is actually driving up prices this year.
When it comes to the stock market, we are still advocating dividend-paying stocks, but only those companies that have a history of increasing their dividends every year. Despite the potential for higher taxes on dividend income in 2013, we would rather our clients pay higher taxes on dividends and get a return on their investments, than roll the dice on non-dividend paying stocks hoping for appreciation. Those non-dividend paying Internet stocks haven’t worked out too well in the past 24 months. Investors need to remember that 78 percent of the 500 companies in the S&P 500 pay a dividend.
With 261 millionaires in Congress, there’s nothing like a massive sell-off to get their attention to do right thing. Let’s hope it doesn’t come to that, but sadly somehow I am not so sure it won’t.