President Barack Obama will likely win a second presidential term in November, but the election's outcome for policy and investing will likely not be as decisive, according to a new research report put out by UBS Wealth Management Americas on Wednesday.
"This appears to be a very close call, and a lot's going to happen between now and Election Day," UBS Chief Investment Strategist and Head of Wealth Management Research, Americas Mike Ryan said at a presentation of the report in New York. "Our view is that it will likely will be a status quo as the likely outcome."
The report points to an Obama win that will also usher in a Senate win for the Democratic party at the "very narrowest of margins," Ryan said. That could include a majority by 51 to 49, or a 50-50 split that would still hand Democrats the deciding vote because of the party's control of the White House, he said. The Republicans, in turn, will likely hold on to their control of the House of Representatives by the same majority they have now.
The next most likely scenario would be a Romney win that would lead to a Republican sweep with both the Senate and the House also falling under Republican control, according to Ryan.
Winning a second presidential term mostly depends on job creation and manufacturing momentum, UBS found in its research. Those measures currently point to mixed results for Obama now, the report said, but must also be considered in context. Today's 8.1% employment rate has come down from 10% in October 2009. The unemployment rate was more than 7.5% when Ronald Reagan was reelected in 1984.
Obama currently has an advantage in the 10 states that will likely decide the election, where polls show he is mostly even or leading for most of them, according to Ryan. Those states include: Colorado, Florida, Iowa, Michigan, Nevada, New Hampshire, Ohio, Pennsylvania, Virginia and Wisconsin.
Regardless of who wins the election, the U.S. deficit will likely be reduced by $4 trillion in the next 10 years, UBS predicts. That includes the $1 trillion in savings from spending caps that came out of last year's debt ceiling negotiations, plus $3 trillion in deficit reduction. A Republican sweep would most likely point to a higher emphasis on spending cuts versus tax increases to get there.
With many decisions requiring bipartisan support, that will mean that many of the policies that come out of the next administration will most likely fall more in the middle of both parties' goals. A Republican administration, however, will be more likely to make progress on Medicare and tax reforms. Existing financial and health care reform would also be vulnerable under Republican leadership, though that leadership would likely not make the sweeping changes that they tout on the election trail.
"You can't just push your own agenda through. You're going to have to eventually work with the other party," Ryan said. "That's why we think that some of the policy options will not vary that dramatically."
When it comes to investments, the UBS report points to an extension of the Bush-era tax cuts for all but the wealthiest and the possible elimination of second home mortgage interest deductions and municipal bond tax exemptions.
For equities, an Obama win would lead to more of the "fair value" UBS sees now, while a Romney win could provide a slight boost.
The financial and health care sectors may be more influenced by the election outcome than some other sectors. A Romney administration would impact the financial sector by catering more toward the industry and pulling back on rules that limit proprietary trading. In health care, a Romney victory would mean less reimbursement and insurance coverage for product companies, but less regulation for managed care companies.
An Obama victory, by contrast, would mean the enforcement of financial and health care reform established during the current presidential term. Two sectors that will likely be shielded from any impact from the election include technology and consumer staples.
A Romney victory in November would also point to lower GDP growth in 2013, that would then go up in 2014, according to the report. The force of that could cause fixed income yields to also go down and then up.