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5 Election Takeaways for Investors

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.

Just in case you were going through election news withdrawal, we've got just a little bit more for you here. Morningstar markets editor Jeremy Glaser is joining us with five election takeaways for investors.

Thanks for joining me, Jeremy.

Jeremy Glaser: Thanks, Jason, and don't worry. 2016 is just around the corner.

Stipp: What do you have for The Friday Five this week?

Glaser: Well, we are going to take a look at those five election takeaways. We're going to look at the fiscal cliff, at health care, at the Federal Reserve, at banks, and finally elections outside the U.S.

Stipp: So, if you thought we had some uncertainty before the election with who is going to win, a lot of that uncertainty gone away on that front, but we have even more uncertainty still out there with the fiscal cliff that's going happen in January unless we see some action in Congress. What's the latest there?

Glaser: This is definitely the big story. Before the election, no one really had a huge incentive to negotiate. So, even though we have basically the same people coming back after this election, we think that they will be more likely to come to a deal even if we're not exactly sure of what the contours of that deal are going to look like.

I think that it's likely that something will be more short term in nature than long term in nature. Coming up with a real, long-term so-called grand bargain is not something that's going to be particularly easy. Coming up with those tax reform measures, finding places where you can get some of that new revenue in a way that's going to be palatable the House Republicans and also something that the president and the Senate can sell to their base is not going to happen overnight. Figuring out where to make those spending cuts in the ways that are going to be the least painful, where you can make those entitlement reforms, is not something that you're going snap your fingers and is going to happen.

I think what's more likely is we're going to find a short-term deal to extend many, if not all of the tax cuts, find a way to keep some of those short-term measures in place, make sure that the debt ceiling gets raised so you don't run into some of those issues you had last summer.

Certainly, there is going to be a lot of volatility during this. I think part of the negotiating tactic is going to be to see how far you can push it. If you aren't credibly willing to walk away and just say we're going to let the fiscal cliff happen, certainly that could diminish your bargaining position a little bit.

So, I think we're going to hear a lot of rhetoric until January and possibly even after, and I think the market is going to react to that, but we think there's a good chance that at least some of the fiscal cliff will be ameliorated before it happens, if not all of it.

Stipp: Mitt Romney's rhetoric before the election about repealing health-care reform certainly put another cloud of uncertainty over health care. We thought some of that had cleared up. Now, the election offers little bit more clarity. You talked to some of our health-care analysts. What did they have to say about the results?

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Glaser: It certainly seems that the history of health-care reform has been dotted with these potential landmines, if you will. If you go back to the special election in Massachusetts where Scott Brown won, which seemed to imperil the law for a while. Then there were the worries about if the Supreme Court was going to uphold it, and then they did. And then there was the question over if the president would be re-elected or if the Senate would stay in Democratic control to really keep that repealing and replacement [drive] at bay, and now that has occurred.

I think that now it looks very much like it's going to be implemented as expected, with those few tweaks that the Supreme Court made to the law with some of the Medicare block grants. I think this means for the health-care companies that a lot of that uncertainty is gone--but certainly, not all of it. Exactly how everything is implemented, exactly what waivers are given and what aren't, the timeline: We still don't completely know the impact, but we think that the market is overreacting to a lot of the news and overreacting to the impact that the law will have, particularly on the managed health-care companies. Like you mentioned, I talked to Alex Morozov and Matt Coffina, who are our health-care analysts who have been following this very closely, and they really think there are still some very good values in that sector even after this election and even after that uncertainty has been lifted.

Stipp: A big player in how the economy is doing has been the Fed. After the election, do you see any changes in what the Fed's policy has been, and what we may see from the Fed going forward?

Glaser: The election will probably lead to more status quo from the Federal Reserve.

Certainly, the Federal Reserve is independent, but they don't operate completely outside of the political vacuum. Ben Bernanke's term is up in 2014. Under a Romney presidency, it's not inconceivable that someone else would have been nominated to that role, given that there had been a lot of criticism of the Fed's more activist role throughout the recession and throughout the downturn so far.

I think Ben Bernanke may still leave in 2014. There have been rumors that he would like to step down, that he wants to go back to academic life. But I think the fact that you have, again, that continuity across all the branches of government means that they'll probably be able keep doing what they're doing. There is not going to be a big change in composition to the Fed Board, and I think that means we're going to continue to see that low interest rate policy, we're going to continue to see quantitative easing until they see employment looking much stronger. So, I think we're going to see more of the same there after the election.

Stipp: Banks took a hit on the day after the election. We heard some tough talk from folks who made it into office about regulations on banks and the financial-services industry.

What's going to be the deal with banks, and how does the election change their fate potentially?

Glaser: In 2008, banks were some of the biggest supporters of then-candidate Obama, and in 2012, they were some of the biggest supporters of Mitt Romney.

They were not happy with the new regulations with Dodd-Frank that came out with the Obama administration. They thought it just tied just their hands too much, made it too difficult for them to really get good returns on their equity. I don't think we're going to see any big changes there, and there could be some challenging regulatory environments for the banks.

We look at things like the way that the Durbin Amendment made it more difficult for [banks] to make money through debit cards, so we saw the reaction of the scaling back of free checking and of changing the way that they handle checking accounts. And the restrictions about the way that they can trade, restrictions about how much capital they're going to need certainly are going to weigh on the banks for some time.

I think here and there we're going to see tweaks to how these regulations are implemented. We're going to see tweaks to the legislation. We saw with the JOBS Act passed last year that both sides are willing to make some changes, but I think the banks are going to have much a harsher regulatory burden over the next four years than they would have if Romney had won.

Stipp: Lastly, if you are going through election withdrawal, you can always turn your attention to some big contests across the pond. What do we need to look for in the elections that we'll see in Europe?

Glaser: This week, a story that got buried under the election avalanche was that the Greek Parliament again had a vote on another austerity package, and no one really knew if it was going to pass or not. The Greek elections that happened a few months ago resulted in a coalition that is a little bit shaky, and some of those parliamentarians kind of peeled off from the majority and decided not to vote for this austerity bill, and I think we could see that coalition potentially collapse, if not immediately, then sometime in the relative near future leading to another election. We don't know what the outcome of that would be.

We know that Greece is really on a knife's edge there. They basically have to do everything that the international community says if they have any hope of staying in the euro. We're not sure what the consequences of them leaving the eurozone would be. It certainly creates a layer uncertainty. Even though we haven't been talking about the eurozone crisis as much, there hasn't been as much news there, certainly, a lot of those long-term structural problems very much remain.

And look at Germany: In 2013, they have Federal elections coming up, and you have to think about how Angela Merkel is thinking about facing those voters again. She has to keep in mind that unlimited bailouts aren't exactly the most popular thing in the world. She needs to sell them that it's worth spending the money to keep the euro together.

So, I think throughout 2013 there are going to be a lot of elections, particularly in Europe, that could have a big impact on the global economy. So just because we're done now doesn't mean that the voters aren't going to have a say elsewhere in a way that could impact the U.S. economy.

Stipp: Jeremy, The Friday Five gets my vote this week and every week. Thanks for joining me.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.