A Four-Year Crystal Ball: Elections Have Consequences

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

The American people have spoken, and more than half of the electorate chose President Obama to continue leading the country for the next four years. In Congress, we saw Democrats retain control of the Senate. Republicans managed to retain control of the House of Representatives. The win in the House for Republicans was the only bright spot for the party this election in what was an otherwise decisive victory for the Democratic Party and, of course, for President Obama.

Interestingly, after all of the hoopla, debates, campaign spending and overblown rhetoric between the two candidates, the government looks much the same today as it did before the election. Now President Obama has four more years to finish the job he stared in 2008, a job he calls “fundamentally transforming America.”

For those of us who don’t want to see America fundamentally transformed, the prospect of another four years of Mr. Obama in charge is a fundamentally frightening proposition. That’s because the president is likely to come out full throttle on more big government spending programs, higher taxes on the wealthiest and most successful Americans, greater control of our economic freedoms via increased regulation on business, and even the prospect of an erosion of our Second Amendment rights.

So, what will America look like in 2016 after another four years of President Obama at the helm?

Here are a few thoughts on where I think we’ll be at the end of the president’s second term (big thanks to Eagle Publishing advisor Nicholas Vardy for pointing me to several of these key data points).

On the economic front, I expect the country to amble along at a rather anemic 2% GDP growth rate. This is what’s been called the “new normal” by political economist, but it is nevertheless rather pathetic when compared to other periods in American history where the economy came roaring back after a recession. The prime example here is in the 1980s under President Reagan, when economic growth surged due to a reduction in marginal tax rates. There will be no such reduction in a second Obama term, and hence the prospect of very slow growth in the United States for years to come.

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In terms of economic freedom, look for the United States to continue its slide on the Global Competitiveness scale. Since the president took office, the US has fallen from first in 2008 to seventh in 2012. Look for us do drop from seventh to perhaps as low as 18th over the next four years.

As for tax policy, we are likely to get across-the-board tax increases in order to fund increases in federal government social programs. The biggest of those programs is ObamaCare, which now will be fully implemented during the president’s second term. Costs associated with this plan are hard to quantify at this stage, but we do know that we’ll see a lot of increased fees, taxes and industry-specific taxes that will likely put the brakes on sectors such as medical devices, and on much of the life-saving technological innovation that these companies offer the world.

What’s particularly disturbing to me is that the president has constantly pitted one group of Americans against another with rhetoric that can be described as “class warfare.” Throughout the campaign, and well before that, the “top 1%” of Americans has been targeted for “not paying their fair share” of the tax burden. This vial rhetoric not only creates envy and hatred for one group of Americans, it’s also factually wrong.

According to government data, in 2009 the top 1% paid 38.7% of all income taxes. Moreover, the top 20% of income earners paid 94.1% of all income taxes. This kind of tax inequality has put the burden of funding the government on the few, and at some point, the few will no longer be able, or no longer willing, to go along with what I think is a form of state servitude. For the fictional portrayal of a society that loots the most successful in the name of “fairness,” I recommend reading the great novel Atlas Shrugged by Ayn Rand.

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Now, in addition to an increase in federal income tax imposed on the most successful in the country, there also will likely be an increase in the capital gains tax, meaning the tax paid on investment income. This will have the pernicious effect of restricting investment, particularly in stocks of the dividend-paying variety. So, look for many of the market’s stalwart dividend stocks to sell-off  or at the very least, trade flat due to a lacking of buying in the sector.

On the national debt front, the country already is drowning in red ink, but that debt level will almost certainly get deeper over the next four years. I suspect we could see U.S. government debt spike to $20 trillion by the time the president leaves office, and that means we’d be looking at a debt/GDP ratio of over 120%. To put that in European terms, we’ll be at the same level as Italy. Given these debt levels, I think we could see more downgrades of our credit rating from various agencies, including Standard & Poor’s, which will likely lower our rating from its current single “AA+” to “AA-”, which is the same rating as struggling Japan.

As for the employment picture, I suspect that the current levels of 7-8% will continue to plague the economy for nearly all of the president’s second term. With the implementation of the ObamaCare healthcare policy, companies are likely to not hire as many full-time employees. The reason will be that it is going to cost too much for these companies to fund health insurance. The new normal here will be more part-time and contract employees without health insurance or other retirement benefits. That will put stress on the economy going forward, and of course, on the headline unemployment rate.

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Finally, the president’s reelection means more easy money from the Federal Reserve, more “money printing” in the form of quantitative easing, bond buying and whatever other new schemes the central bank can cook up to keep the economy from entering a tailspin. That means more debasement of the U.S. dollar, and the likelihood of more upside in hard assets such as gold and other precious metals such as silver. I also suspect that a stagnant economy, tepid employment picture and higher taxes will keep the equity markets meandering along for the next four years.

Look for the S&P 500 index to basically be dead money, and to trade at about the same level four years from now as it’s trading today—and that is the best-case scenario that I see.

The bottom line here is that the American people have spoken, but I certainly don’t like what they have said. If I am correct, then you will want to make sure your money is shielded from the slow growth, high tax, high regulation and anemic returns destined for the domestic equity market in the years to come.

Follow Jim on Twitter: @Woodsish.

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