US equities braced for a vote of confidence
Politics, the economy, Europe and the weight of money in the stockmarket are currently driving US equities close to their near-term high and 10 per cent away from the absolute high in October 2007.
When thinking in broad terms about the effects on the market of the election outcome, Republicans are more likely to lower taxes and cut subsidies, whereas Democrats are liable to maintain grants and subsidies and increase regulation.
Historically, economics have been more important to the market than politics but because the fiscal cliff has become so large and the two parties are more divided than ever, politics are increasingly important. The dilemma for both parties is whether to reduce the deficit at the risk of a recession.
Healthcare and defence are two sectors that will be most affected. Healthcare could benefit from Obamacare, while the defence sector would be helped by a Republican win because there would probably be lower tax rates and less regulation.
The healthcare issue is particularly complicated because it depends on how many seats in Congress the Republicans can obtain to block healthcare reform or, at best, delay it. In an effort to reduce the deficit, the reductions in Medicare and Medicaid budgets are likely to remain whoever wins. If president Barack Obama wins, the Medicaid (lower income) health maintenance organisations (HMOs) will likely benefit, whereas a victory by Republican challenger Mitt Romney could help the Medicare (elderly) HMOs. It is perhaps surprising that a Republican win would hurt hospitals, while an Obama victory would reduce bad debt in hospitals by paying for people who are currently unable to pay their bills.
Turning to defence, which is less complicated, it seems most likely that the big programmes will be cut, rather than headcount, because it is easier to do and creates less unemployment. Overall, it is perceived that a Republican victory would be better than a Democrat one, but under either scenario budgets will be cut.
A Republican win may be a significant positive for the technology sector. It has the largest proportion of net cash of any sector in the index at more than $400bn (£253bn) – the majority of which is still overseas. Should the Republicans win, we may see a tax holiday on the repatriation of this cash, although it may be tied to a commitment for increased research & development (R&D) spending. Companies such as Microsoft have been borrowing money in the US at very low rates and buying back stock using the offshore cash as collateral. The other key area would be an extension of the R&D tax credits. The current credits are not far reaching enough and are only temporary. A more encompassing programme would be a huge boon for the tech industry. Google alone spends 14 per cent of its revenue on R&D, which equates to just under $6bn in the past 12 months.