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After Obama Win, What's Next for Wall Street?

Richard Satran

Wall Street got what it wished for in the election--certainty at last.

The stock market staged a "relief rally" Tuesday before the results were officially reported, with early exit polls and political experts already seeing a consensus forming that the president would win re-election. Some market watchers see more gains in the days ahead, even as shares dipped today amid worries over the upcoming "fiscal cliff" standoff.

[Read: Are Second Terms Good for Stocks?]

"The worst-case scenario heading into Wednesday would have been an election without a decision and having to wait for this thing to drag on a long time without a winner," says Art Hogan, managing director of Lazard Capital Markets. "The market will be relieved that we avoided that scenario."

Still, stock prices reversed their big election-day rally early on Wednesday, with the Dow Industrials off more than a percent in early trading. After a pause, though, investors will probably show renewed interest in buying shares, Hogan says, especially if Washington starts to work on a plan to avoid going over a fiscal cliff at year's end.

Market watchers had fretted that a "hung election," in which neither candidate won a majority, could have left the economy leaderless as it neared the across-the-board spending cuts and tax increases that could remove $600 billion from the economy at the start of 2013. With the opinion polls tightening over the last month, the Dow industrials shed 500 points amid mounting worries over a post-election leadership vacuum.

"Now we can get onto the No. 1 job of focusing on the problem of the fiscal cliff," says Hogan. "I get a sense that in pretty short order, the market will be happy we have clarity over the election and we've left the unknown factor of who will be President behind us."

While an election cliffhanger would have made the plunge over the fiscal cliff all but inevitable, the risk of failure is still significant with Congress still split on party lines. But Barack Obama's clear win, along with Democratic gains in the Senate, will likely tamp down the opposition somewhat and encourage consensus, analysts say.

"Everyone knows that the biggest issue is we have facing us is to get the government working again and until it does, the economy is not really going to improve dramatically," says Mark Germain, chief executive officer of Beacon Capital Management.

[Read: Which Party Does the Market Perform Best Under?]

The presidential role. The election of a president alone will not do much to change economic policy, argued Pimco fund manager Bill Gross in his election-eve commentary. "Election Day seems like such a futile gesture to me. Red/Blue Republican/Democrat. What kind of choice do we have when we pull the lever?" wrote Gross, known for his above-average fund returns and his iconoclastic market commentaries.

"Presidents have relatively little control over the economy," agrees David Edwards, president of Heron Financial Group. But the president was re-elected, in part, because he has done an adequate job of keeping the economy moving, "especially given the difficult hand he was dealt when he came into office." The economy and markets then were in severe turmoil, in perhaps the worst economic crisis since the Great Depression.

"But it has taken four years for average Americans to feel confident enough to borrow money and spend. It's really just happened clearly over the last two months," says Edwards. Consumer confidence and housing have shown real gains, and employment has grown for the past 25 months in a row.

He adds that Obama's decisive election will create a pathway for clearing up the immediate budget issues, but the president then needs to focus on cutting the huge Federal deficit, a much more difficult problem.

The long view: Wall Street and presidents. While the deficit kept growing, stocks advanced in Obama's first term, and the market has turned in the third-best performance of any president over the past century. Despite Wall Street's avowed preference for Mitt Romney and the Republicans, stocks have performed better under Democrats, studies show.

To be sure, the market's gains under Obama came after stocks had slipped to a very low level. And it's no indication of future performance. Indeed, the first year of presidential terms have, on average, been the weakest of the four years, according to the Stock Traders Almanac.

[Read: How the Election May Influence the Investment Advice You Get.]

The economy will lend little support in the year ahead. Economists see below-average trend growth continuing, and a big breakout is seen as unlikely for the economy or the market. Average forecasts of economic growth range from 2 percent to 3 percent for 2013, and even those tepid numbers could be at risk. A failure to solve the fiscal cliff could mean an end to economic growth: Fidelity Research figures it could trim as much as 4 percent to 5 percent from GDP.

Pimco's Gross says his firm "expects a middle ground fiscal compromise from Washington." That, along with Fed stimulus, could keep the economy ticking along at a 2 percent rate. But that below-normal trend growth would not provide much of a lift for stocks.

Gross added that status-quo politics will not solve the big problems needed to get the economy out of its rut. And without solving bigger issues of the deficit and stimulating real growth, investors will be left with low returns for a long time to come.

The end result, he said, will be a rate of return for investment portfolios that barely matches even the low rate of inflation in the sluggish economy. The election will not change this, he said in his election commentary. "Investors should recognize that asset and currency prices ultimately rest on the ability of a real economy to grow."

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