The economy will face a slow, grinding improvement over the next two years, but the stock market will fare better because of the impact of the upcoming election, says David Sowerby, portfolio manager for Loomis, Sayles & Co., a Boston investment company.
The stock market generally performs well in presidential election years and likes a federal government divided between parties, which is what Sowerby predicts will be the case in the United States as a result of the November election.
The portfolio manager was the guest speaker at a Webinar on the impact of the election on the economy hosted by Envestnet, a wealth management firm based in Chicago.
Conventional wisdom has President Obama winning re-election, the House of Representatives remaining Republican and the Senate being too close to call, Sowerby says.
With that outcome, Congress will end up compromising on the "fiscal cliff," federal spending reductions and tax increases that are automatically slated to become effective at the end of the year, he said. Total tax increases could be $800 billion if all current tax cuts are allowed to expire, but Sowerby predicts a compromise will be reached at the last minute that will result in tax increases of between $200 billion and $300 billion.
That scenario would result in an average U.S. GDP growth rate of about 2.2 percent, he predicts, which will mean a slow grind for economic improvement.
The direction of the federal government has become an all-or-nothing scenario when one party or the other is in charge, he says. "If we stay in a divided political control in Washington it is better for the stock market," Sowerby says. He believes stock-market growth will be 8 percent to 9 percent over the next year if his predictions prove true, down from double-digit increases now, and corporations will see 5 percent to 6 percent growth in earnings.