The re-election of President Obama last Tuesday has triggered a fairly sharp fall in US equity prices, along with a decline in bond yields. Although I argued in this blog last weekend that bonds would prefer an Obama win, while equities would prefer a Romney victory, the extent of the decline in equities in mid week came as a surprise. To some extent, the market was reacting to prospective increases in capital gains taxes, and to tighter regulation of the financial sector, in the president’s second term. But undoubtedly the main factor was uncertainty about the fiscal cliff.
Most investors are assuming that Washington will agree to postpone most of the fiscal tightening which is implied by the “cliff”, but only after prolonged negotiations that could continue past the initial deadline at the year end, when the lame duck Congress departs from the Hill, and which might even be extended past the president’s inauguration on January 21. Read more