Historically, markets since 1901 have not reacted favorably to a split party rule when one party is in the White House and another party controls Congress, said Clay Nickel, vice president and portfolio manager for Arvest Bank, 119 E. Third St., Ottawa.
America finds itself in a mixed governance once again after Tuesday’s election, with incumbent President Barack Obama ensconced in the White House and the Republican Party retaining its grip on the U.S. House. When such a split party rule occurs, Nickel said, Americans have seen a -1.3 percent return on their investments during the first year of the new term, based on figures compiled for the past 111 years.
Nickel, who shared that data at the First Friday Forum earlier this month, offered the caveat Thursday that the historical market reaction to the presidential election could be anything but average in 2013.
How President Obama and Congress handle such factors as the fiscal cliff will affect markets, Nickel said.
The fiscal cliff refers to a series of recent laws which, if unchanged, will result in tax increases, spending cuts and a corresponding reduction in the budget deficit beginning in 2013, according to financial analysts, who also asserted these laws include tax increases due to the expiration of the so-called Bush tax cuts and across-the-board spending cuts under the Budget Control Act of 2011.
Some major domestic programs, like Social Security, federal pensions and veterans’ benefits, are exempted from the spending cuts. Spending for federal agencies and cabinet departments, including defense, would be reduced through across-the-board cuts referred to as budget sequestration.
During the third presidential debate, President Obama vowed budget sequestration would not happen.
The Treasury Department recently announced it expects the country to hit its debt ceiling, a legal limit on the amount the government is allowed to borrow, near year’s end, according to news reports. Congress then would have a matter of weeks to raise the ceiling, now about $16.4 trillion, before sending financial markets into a panic, financial analysts and Congressional leaders have warned.
“[Action on] the debt ceiling probably will occur by March or April at the latest, but it could come as soon as January,” Nickel said.
The debate could become “extremely contentious,” Nickel said, based on the outcome of Tuesday’s election.
“Moderate Democrats lost seats, while you had Tea Party Republicans basically not losing seats,” Nickel said.
The result could galvanize the division between the two parties’ viewpoints, he said.
Local Republican and Democrat party officials have differing views on the potential for Congress and President Obama to find common ground during his second term.
The split party rule could result in more Congressional gridlock, Cathy McClay, vice chair of the Franklin County Republican Central Committee, predicted Wednesday after the election. Though McClay said she was hopeful both sides could work together for the good of the country.
Caren Rugg, vice chair of the Franklin County Democrat Party, said while President Obama might have been reticent to bring out the “big stick” before the presidential election to force both sides to the bargaining table, she predicted he would take a more forceful approach to hammering out negotiations in his second term.
“I think the fact [President Obama] won the Electoral [College] and popular vote shows Americans realized he wasn’t going to be able to fix the economy in four years, and they were willing to give him a few more years to get the country back on track,” Caleb Correll, chairman of the Franklin County Democrat Party, said Wednesday.
During his Friday Forum presentation, Nickel provided historical market data that showed in the first year after an election under Republican single party rule, investors typically see a 7.9 percent increase in their returns. In the first year of a new term when Democrats control the White House and Congress, investors see a 6.2 percent increase in their returns.
Though neither of those single-party rule scenarios will play out for investors in 2013, Nickel said there is a silver lining for investors.
“Fundamentals still drive market returns,” Nickel said. “In the short-term, I think we will see continued volatility, against a slowing improving backdrop.”
Doug Carder is senior writer for The Herald. Email him at firstname.lastname@example.org