The Great Debate
Advisors Capital Management
By John Petrides
October 8, 2012
The first of three presidential debates kicked off last week with each candidate portraying the core fundamentals of their respective party, neither of which backed down from their beliefs. President Obama continues to believe that the government should be a large and influential role in the progress of the country - the popular stance of the Democratic Party since FDR. Mitt Romney, the Republican candidate, takes the polar opposite view and believes that the laws of supply and demand should ultimately be allowed to take its course, with as little government involvement as possible -- emphasizing the Reagan era Republican Party. As the candidates continue to jockey for sound bites, a debate among investors continues to rage: What will happen to the market after the election?
When asked this question, my answer is typically that I have no idea, and neither does anyone else. Maybe, if President Obama wins the market sells off the next day, since he is perceived to be anti-business. Or, if Romney wins, maybe certain sectors such as financials and healthcare will see a brief rally, because Romney has talked about repealing Obamacare and providing clarity to Dodd-Frank and financial reform. Regardless of the outcome of the election, I can’t see how much will be different in the economy or the stock market.
On the monetary policy side, the Fed has already added a massive amount of liquidity into the system. If consumers and CEOs are tentative to spend, I’m not sure how much more Fed Chairman Bernanke can do? That turns our attention to the fiscal side of the equation. Is either candidate, if elected, going to be able to control Congress’ dysfunctional behavior? Will either side be able to impose massive cost cutting measures to control the budget deficit, yet still promote economic growth? Will either side be able to impose tax hikes, yet prevent the economy from falling back into recession? Regardless of the outcome of the election, I think the economy and the market will continue the process of muddling through and slowly grind higher. There will be periods of turbulence, but as long as credit markets remain open at historically low interest rates, and profitability remains sound and corporate balance sheets healthy, then the economy should be able to gradually recover. As long as the housing market continues to be a tailwind to the economy, this should trickle down to other segments. It is this trickle down phenomenon that the Fed is banking, and the Presidential candidates are hoping.
Frankly, I’m not over concerned about what happens to the market the day after the election. When investors ask me this question, I respond with, “Are you nearing, or are in retirement and need income today?” Most answer yes. So I respond with, “then on the day after the election, you will still need income regardless of who wins. You still need a plan. You should look at our Income with Growth strategy which is currently yielding 5.6%* net of fees.” For our more aggressive investors in our Growth strategy, I phrase it slightly differently. I tell them, “We are not constructing your portfolio for the next three months, but for the next three years. We are looking for stocks with strong balance sheets, generating high levels of free cash flow, trading at a discount to their earnings potential.” Investors must stay focused on their financial objectives, especially in times of uncertainty.
* Clients’ net yield is calculated by using a 1.50% gross annual combined management and advisory fee. The gross yield of Advisors Capital Management’s (ACM) Private Income with Growth Composite is 7.10% as of September 30, 2012. The composite’s 7.10% gross yield minus 1.50% annual management fees equal 5.6% net yield to the composite. A lower or higher fee and any additional trading costs will affect the net yield (income) to the client accordingly. This estimated yield is for illustrative purposes. ACM’s income with growth strategy seeks to generate income from dividends and interest which is subject to market and interest rate risk and is not guaranteed. Growth of income is not guaranteed. Investors can lose principal and should review long term performance results and risks with a financial advisor before making any investment decision. Portfolio diversification does not eliminate the possibility of principal loss. ACM is a registered investment advisor. For additional information regarding fees and services please request our ADV Part 2a and 2b.
(c) Advisors Capital Management