Yoshikami: Election 2010: Gridlock Wins
Republicans, Democrats, Tea Party rebels, Independents, and anyone else you can name, all are banging drums loudly to get your attention; they seek your vote and your support this election season.
The ads portray this as a battle for the next two years’ legislative agenda and to some extent this is true.
There is little doubt Republicans will shift the balance of power away from current strongly Democratic leanings. Depending on who you believe, Republicans will likely pick up roughly 50 seats in the election which will surely slowdown initiatives such as cap and trade and slow the pace of additional health care reform. Spin is in full force and I have no doubt that whatever outcome plays out, it will be a claimed victory for everyone.
Only in Washington can you lose but still..... uhhhh....win (?).
But stepping back from the propaganda for a moment, what is more clear is that gridlock is surely up ahead.
Balance of power in our democratic system means debate and slow progress.
While dictatorship and authoritarianism is far more efficient, it is not the principles on which this country was founded.
So expect on election day to see the United States lurch towards more balance, more gridlock, and more jockeying for mind share as automatic votes are no longer assured for the administration's agenda. This means slower progress on proposals. And much more compromise.
Expect that there will be one clear winner in this election and that is the principle of clarity. It’s clear there will be gridlock. True, that clarity might mean less change but at least the business community will know the rules will be more likely consistent. Likewise, investors and the public alike have been floating in a state of uncertainty that has caused entire sectors to freeze awaiting legislative agendas. A healthy dose of balance and good old fashioned Washington debate might be just what is needed for investors.
As Jamie Diamond of JPM stated when discussing financial reform, it's less about what the rules are and more about knowing the rules won't change. Clarity. That's the place we find ourselves in this election; gridlock means the status quo will have some lasting impact. At the very least there will be some understanding of what the investment environment will look like going forward.
So as a reader and viewer of CNBC (and an investor), what are you to make of this state? Despair? Perhaps not. After this week, investors need not fear revolutionary steps towards either party's agenda and, while that might not be the hoped-for outcome for those looking for change, it does create some comfort for the investment community.
Expect the health care sector to finally see a path out of uncertainty as additional steps towards health care reform are slow in coming. Financial service companies, long the punching bag for those looking for villains, may finally be able to emerge from the malaise caused to some degree by a desire for massive regulation.
And combined with the Federal Reserve's efforts at propping up the economy, watch for consumers to surprise on the upside as 401(k) balances begin to creep upward. Yes, unemployment is at 10%, but with QE2 in full force, low interest rates will prompt consumers to open their wallets once again. Expect shoppers to flock to Costco and Wal-Mart as they seek value with open wallets.
Something else of note; the Presidential election is now only 2 years away. JQ Public can expect an avalanche of programs, credits, treats, and the like designed to curry favor as the next elections looms. Perhaps this is why the 3rd year of a president’s term is often good for investors. Yes, equity returns in the 3rd year tend to be positive. This cycle, coupled with no dramatic policy shifts, could very well be a positive once again for investors.
The great thing about the United States is that diversity wins time and time again. As the sage (or at least humorous) philosopher, Jon Stewart mused in this past weekend's sardonic summitin Washington D.C., things do get done in this country. While we fight amongst each other, that doesn't mean that we must vilify those that disagree with our views. And that’s why in the end, this country has succeeded; debate and balance has worked even if it slows change.
That's the beauty of the democratic system that has stumbled forward in this country for over 200 years. Maybe that’s why Warren Buffet is so bullish on this country. And maybe that’s why, despite initial leanings towards foreign assets, Berkshire Hathaway is still basically invested in United States stocks. He’s a believer.
So, as you watch the coverage this election night and the pundits debate whether states go red or blue or any other color of their choosing, remember that more balance will lead to clarity. Whatever changes might be coming will be less cataclysmic and more incremental. You might not agree that this is the best path for the country but it does create some certainty for investors.
The road will be shrouded in less fog. And after three years of seeing the impossible come to pass with devastating results, maybe a little less change might not be the worst thing in the world for investors. Calm, gridlock, clarity; call it what you like but when this mid-term election is over, that’s what we will have.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.