By James Saft
(Reuters) – If worrying about the impact of politics on your portfolio makes you want to scream, you probably ought to just turn off your TV and phone for the next seven months.
The 2012 U.S. presidential and congressional elections could set the tone for years to come on the single issue that may have the most power to move markets: deficits.
The United States has dug itself a deep fiscal hole, and that means some combination of spending cuts and tax increases to get out of it. More worryingly, perhaps, is a political atmosphere in which cross-party cooperation isn’t likely, increasing the chances of policy gridlock and bigger issues later.
Almost no matter how Washington plays it, the deficit will be a negative for financial markets. If it is allowed to grow, or even if investors decide there is not sufficient commitment to address it, U.S. interest rates could rise, hurting bonds and stocks. On the other hand, every dollar saved in government expenditure is one that will never find its way into corporate tills or household pockets.
A too rapid reduction of the deficit would hit the economy hard. On the other hand, rises in taxes will, obviously, have a similar effect on individual and corporate willingness to spend and invest. While individuals clearly have not been saving to prepare for higher taxes and fewer services in the future, it is one explanation for why corporations have been so slow to invest their cash hoards.