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The Monarch Report 11.12.2012.doc

The Monarch Report 11.12.2012.doc

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Published by: monarchadvisorygroup on Nov 12, 2012
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11/12/2012

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Elizabeth Wilson, MS, CFP®, CMFC
The Monarch ReportNovember 12, 2012
The Markets
Special Post-Election Analysis
With the election behind us, what’s next for the economy and the financial markets? In thisspecial analysis, we’ll take a look at what the election means, how the markets are reacting, andwhere we go from here.
What the Election Means
For starters, the political makeup of the country hasn’t changed much. President Obama remainsin the White House, the Democrats are still in charge of the Senate, and the Republicans retainthe House. With no significant change in the balance of power, both parties will have to findways to compromise in order to keep the country moving forward and to avoid the economyfalling off the looming fiscal cliff.Economically, our politicians need to tackle two major issues – the fiscal cliff andunemployment.The fiscal cliff is perhaps the biggest and most immediate of the two. As a result of previouslegislation, deep, automatic federal spending cuts and tax increases will take place in Januaryunless the President and Congress agree to some alternative plan. If they fail to reach anagreement, going over the cliff, “would not only risk another recession, but would intensifyanxiety about the dysfunction of the U.S. political system,” according to
The Wall Street Journal 
.On a related note, our ever-growing national debt is deeply entwined with the fiscal cliff issue. If Washington can effectively solve the cliff issue, it might also put the deficit on a path tosustainability – and that could be great news for the economy and the markets.The second issue is unemployment and it is deeply entwined with economic growth. While theunemployment rate has come down, it’s still too high as, “roughly 3.6 million Americans have been without work for a year or more and are still looking,” according to
The Wall Street  Journal 
. Government policies and regulations have a major impact on corporate America’sdesire to hire and expand. If our leaders can enact pro-economic growth policies, it mightencourage businesses to reinvest and hire more people.Here are several other things to keep in mind as a result of the election:
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070www.monarchadvisorygroup.com
 
Health care overhaul.
Love it or loathe it, it’s here to stay. Among other things,companies with 50 or more full-time equivalent employees will be required starting in2014 to provide health-insurance benefits or pay a penalty. While small businesses maynot be happy about that, at least they can now plan for it.
Tax increases.
President Obama has said he’d like to see taxes rise for couples earningmore than $250,000 a year. Also, tax rates on dividends and capital gains may rise. Of course, these won’t happen unless Congress passes them.
Tax breaks.
Both sides seem to agree that certain tax breaks and loopholes will have togo as part of any compromise. And, while this might avoid raising
tax rates
, it wouldmean a
tax increase
for those affected.
Entitlement reform.
Any “grand bargain” on the deficit will likely mean changes toSocial Security and Medicare. In other words, we could see Democrats agreeing toreductions in benefits in exchange for Republicans agreeing to tax increases or closingtax loopholes.
Easy money.
With the President’s reelection, Federal Reserve policy is likely to remain“easy.” This could mean more rounds of quantitative easing and continued low interestrates.The economic issues facing our country are serious and the folks in Washington know it. Theyalso realize it will take compromise to get things done. As CNN said, “Both sides agree the bestoutcome would be a broad deal addressing the overall need for deficit reduction, includingreforms to the tax system and entitlement programs such as Social Security, Medicare, andMedicaid.” Let’s hope our politicians put politics aside and do what’s best for our country to getus growing strongly on the road to economic prosperity.
How the Markets Are Reacting
With the polls showing the President in the lead going into Election Day, the financial marketsshouldn’t have been surprised when he won – but it appears they were. U.S. stocks dropped 3.6 percent in the two days after the election before finishing slightly higher on Friday, according todata from Yahoo! Finance.Looking at history, it’s interesting to note that the stock market performed quite well duringPresident Obama’s first term. The S&P 500 index rose 76 percent from inauguration day to lastweek’s Election Day. By contrast, it declined 13 percent during George W. Bush’s first term,rose 60 percent during Bill Clinton’s first term, and rose 25 percent during Ronald Reagan’s firstterm, according to MarketWatch. How much of those returns can be attributed to eachPresident’s policies is anybody’s guess, so it’s hard to draw solid conclusions from them.In terms of sectors to monitor, MarketWatch says the following might benefit from the electionresults:
Healthcare.
Drug companies and insurers might benefit from the healthcare mandate ascoverage expands over time.
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070www.monarchadvisorygroup.com
 
Home construction and real estate.
Continued quantitative easing and low interest ratesmay bode well for the housing market. This could be very beneficial for the economy ashousing plays a significant role in economic growth.
Precious metals.
Gold prices rose last week as investors think continued quantitativeeasing could be bullish for the shiny metal.
Where We Go From Here
Putting the election behind us has removed one hurdle to moving the country forward. Withcampaigning out of the way, Washington can get back to work.As Congress and the President engage in posturing and gamesmanship over the fiscal cliff andthe tax and entitlement reform issues, be prepared for volatile stock prices over the next couplemonths. Ironically, politicians may not take decisive action on these issues until forced tothrough the pressure of lower stock prices.Aside from the pressing issues, is there a reason for optimism on the economy? Yes. Accordingto Bloomberg, “The median prediction of 37 economists surveyed by Blue Chip EconomicIndicators is that during the next four years, economic growth will gather momentum as jobless people return to work and unused machinery is put back into service.” Bloomberg also pointedout the following positive indicators:
Banks have strengthened their balance sheets.
Most households, which borrowed too much during the housing bubble, have pared their debt back to normal levels through a combination of frugality and default.
Upper-income households’ balance sheets are in good shape, although mortgage debtremains a heavy burden at lower-income levels, says Mark Zandi, chief economist of forecaster Moody’s Analytics as quoted by Bloomberg.
Housing prices have gone from falling to rising, buoying confidence.
Increased consumer spending should induce more business investment in a virtuouscircle.
There’s pent-up demand for residential and commercial construction.Stepping outside the U.S., we still have major economic and budget issues in Europe, China isgoing through a once in a decade leadership change while its economy slows down, and theMiddle East, as always, is a wildcard.As you can see, we have a lot on our plate to monitor! And, as your advisor, we’re doing our bestto keep you well positioned to benefit no matter what Washington throws at us.
Data as of 11/9/121-WeekY-T-D1-Year3-Year5-Year10-Year
Standard & Poor's 500 (Domestic Stocks)-2.4%9.7%12.3%8.1%-1.0%4.7%
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070www.monarchadvisorygroup.com

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