The long awaited elections are now behind us and, as we expected, nothing has changed in Washington D.C. An equally divided American electorate has chosen to maintain the political status quo. Our government leaders, unfortunately, do not inspire confidence and last week’s “post-election” stock market decline underscored the financial market nervousness regarding our economic prospects, while hinting at more volatility over the next few months.
Pacific Wealth Management has maintained a conservative posture to our portfolios throughout the year. European Union challenges, the presidential election and a muddy tax outlook increased risk levels across most financial markets. The global media is now obsessing over the looming year-end “Fiscal Cliff” issues awaiting the world’s largest economy. If the U.S. Congress and President Obama do not compromise, the expiration of the Bush tax cuts will dramatically increase taxes and impose draconian across-the-board spending cuts and send the tepidly-growing American economy into another deep recession. We do believe the politicians will come to a last minute resolution, but likely play the same game of chicken we painfully watched in the summer of 2011 with the last “debt ceiling” debate. President Obama has a little more incentive to compromise, secure his legacy and avoid lame-duck status by breaking the gridlock in Washington. Unfortunately, we feel the most probable outcome will be another Band-Aid solution that defers the politically challenging, but much needed long term deficit reduction solution, to another day or even future year. This political drama and resulting financial market volatility are presenting opportunities for us to further diversify into investments offering competitive long term inflation protection.
As the global economy continues to slow, we expect interest rates will stay low in the foreseeable future. The increase we expect in taxes is likely to diminish the economy’s ability to grow and overall investment return expectations have diminished. We continue managing investment risk with a focus on wealth preservation.
We wish you and your family a warm and enjoyable Thanksgiving holiday and an appreciation for our many gifts.