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U.S. President Barack Obama speaks to supporters during his victory speech during his election night rally in Chicago, November 7, 2012. (JASON REED/REUTERS)
U.S. President Barack Obama speaks to supporters during his victory speech during his election night rally in Chicago, November 7, 2012. (JASON REED/REUTERS)

Obama and gridlock: Time to be bearish Add to ...

Heading into the election, there was no secret that Wall Street – and, to a lesser extent, Bay Street – preferred to see a Republican victory in the U.S. presidential election on Tuesday. And if there was to be a Democratic victory, then please no gridlock.

But with the Democrats winning the White House and losing Congress, gridlock is here again. And now strategists and market watchers are reacting.

Jack Ablin, chief investment officer at BMO Private Bank, has shifted from an “overweight” position in U.S. stocks to a “neutral” position, with the difference moving into emerging markets.

The way he sees it, the S&P 500 is fairly valued based on estimated earnings of about $100 (U.S.) a share in 2013 – and the Barack Obama victory isn’t going to give this valuation obstacle a positive spin.

“With the higher tax rates, the risk in earnings is likely to the downside,” he said in a media conference call. “Perhaps with a Mitt Romney victory, we would have seen an upward skew to earnings next year.”

Andrew Busch, global currency and public policy strategist at BMO Capital Markets, who also participated in the conference call, raised the prospect of credit downgrades from ratings agencies, which might also weigh on U.S. stocks.

“My understanding is that President Obama will have less of a tether from Moody’s and Fitch to negotiate and come up with a solution [to the looming fiscal cliff of rising taxes and reduced government spending],” he said.

“If there is only a partial resolution to the fiscal cliff, with not a clear path set, then I think the ratings agencies will really start to warn that they’ll downgrade the United States somewhere in the first quarter of next year.”

Over at Credit Suisse, Andrew Garthwaite, sees some good and some bad in the Obama victory.

On the bad side of things, he believes that the President’s proposal to raise tax rates on dividends and capital gains could shave off about 5 per cent from Credit Suisse’s fair value estimate for the S&P 500.

“If we assume that the market had priced a 50 per cent chance of victory for Obama anyway, then this in isolation could take 2.5 per cent off the markets,” Mr. Garthwaite said.

Investors seem to agree. In mid-morning trading on Wednesday, the S&P 500 was down 27 points or 1.9 per cent, to 1402. The Dow Jones industrial average was down 234 points or 1.8 per cent.

But wait, Mr. Garthwaite sees an upside to the Obama victory too: “An Obama victory reduces the likelihood of an escalation in China trade tensions and, above all, removes the risk of a more hawkish Fed,” he said.

So far, investors appear to be concentrating on the downside.

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