U.S. presidential candidate Mitt Romney says he knows exactly what to do to boost America’s economy: reduce corporate tax rates, end capital-gains taxes on families earning less than $200,000 and cap government spending at 20% of GDP. His adversary President Barack Obama, meanwhile, promises a mix of spending cuts and tax increases to tackle government deficits. He would raise taxes on capital gains and dividends for the wealthy and continue expanding health care. American voters—and Canadian investors—are wondering which candidate will be better for U.S. stock markets, and for the Canadian markets that closely track them.
Talk to non-partisan experts and many say the same thing: ongoing financial crises will relegate the winner of the November 6 presidential election to a bit role in the twists and turns of the global economy. “There are bigger events looming on the horizon, such as the euro crisis and U.S. debt problem, that will overshadow who will sit in the White House,” says University of British Columbia economist Werner Antweiler. Canada’s top market strategist, CIBC World Markets’ Peter Gibson, is on the same page. “The problems are so much bigger than Obama or Romney. Both are constrained in the policy actions they can undertake,” he says.
Look at it this way: Republicans are often perceived as better for stocks because they espouse lower taxes and smaller government. But how can they substantively cut taxes given gargantuan fiscal deficits? The same goes for the Democrats, but in reverse. How can they ramp up taxes to fix government finances when the economy is pinned down? Or try to jump-start it with a burst of public spending when government coffers are bare?
So if you’re a stock market investor, there’s no need to follow the ins and outs of the election season. Until the debt binge of previous decades is worked off—a process that could take several years—U.S. and Canadian stock markets will likely have a downward bias, interrupted by occasional rallies whenever central banks intervene to keep economies from slipping into recession or depression.