By Mike Byrnes

Potomac Research Group director Greg Valliere told advisors that President Obama is emerging as the favorite to be re-elected even though former Massachusetts Governor Mitt Romney has some reasons to remain hopeful.

Valliere spoke last Thursday at a State Street Global Advisors-hosted event in Boston to discuss investment implications of the fall elections. Whatever happens in the election, there is still a lot of uncertainty in our country's future. The panel was called 'Investment Implications of the Fall Elections.'

The panel included Valliere, Shawn Johnson, investment committee chairman at SSGA, Dan Farley, CIO of the investment solutions group at SSGA, and the moderator, Andrew Astley, senior managing director and global head of product marketing at SSGA.

Valliere opened by stating that he is not talking from the left or right. Instead, he proclaimed himself as a cynic. "Never in my career have I seen a Congress this dysfunctional." He added rather than working out the fiscal cliff issues around the tax changes that will occur in the new year if no actions are taken, the politicians are more concerned about rolling out their various sound bites.

After the election, the Thanksgiving break will take place, so he thinks little will be done until December. Valliere claimed he had insider information that if Romney wins, he does not want changes made until he takes office. He believes a Romney victory will give some certainty for businesses.

"If Obama wins, I think he will go once again for a grand compromise," said Valliere. However, the Simpson-Bowles commission recommendations, with tax hikes included, will not get through a Republican-dominated House. What that means is the can will be kicked down the road to the first quarter or maybe until June.

He admitted to not knowing what to tell an attendee who asked him what to do about investment gains. He sees this as a challenge for advisors, since nobody can make a recommendation with certainty. "This lack of certainty will prevail until we get this deal done," Valliere remarked, adding that this election could make the gridlock even worse, "like the year 2000, hopefully without the hanging chads."

Election Prediction

Like many pundits, Valliere voiced surprise about the Romney campaign's tactical inertia and failure to adapt to attacks they should have anticipated. "I can't figure out what happened in June. The White House had a relentless barrage of negative ads," he said.

Valliere didn't understand why the Romney camp did not counter with its own messaging. He explained the power of negative ads and that the impressions they give can decide an election. "Whoever's negatives are higher will lose the election," stated Valliere.

"I am persuaded that Obama is a slight favorite," Valliere told attendees. He observed that Romney is not very strong with women and Hispanics, adding that Reagan won with high unemployment. Moreover, polls show the public still blames Bush more than Obama for the economic crisis.

If the Republicans win the House and Senate with Obama as the president, Valliere joked, "It could be like Clinton's second term, without the interns."

Watch Out For Israel, Iran

"There is a growing likelihood that Israel will move on Iran," said Valliere. If this takes place before the election and Obama is forced to come out against Israel, he asked, "Obama might lose Florida, don't you think?"

He asked insiders how long will this war go on and he has heard, 'Not months, but weeks. And it will be messy.'

"We need to get through the fiscal cliff and [Israel-Iran]. It will be a rocky ride to get from here to there," said Valliere.

Other Insights

SSGA's Farley explained that when we think about asset allocation, it is important to understand longer-term political issues. He expects more modest economic growth rates and sees two key drivers to our economy. "First is employment, but maybe more important is that underemployment is as high as it is," said Farley. He believes just under 7% is the new natural rate of unemployment. There is a long windy road we are going to have to go through."

Johnson said, "I do think the election is really interesting for a lot of reasons." He sees a real possibility that Romney wins the popular vote, but loses the electoral vote. "It could come down to farmers in Ohio," said Johnson.

After Obama's Speech

On CNBC, just after the President's nomination acceptance speech, Valliere declared, "On a scale of 1 to 10, I give it an 11. There is no question in my mind that by Monday Obama will be leading, and leading by a few points."

When asked why he thought this, he said, "He has reignited the enthusiasm in this base."

With three Presidential debates to look forward to, Valliere said, "Romney still has a chance, but I think he goes into October as the underdog."

Mike Byrnes founded Byrnes Consulting to provide consulting services to help advisors become even more successful. His expertise is in business planning, marketing strategy, business development, client service and management effectiveness, along with several other areas. Read more at www.byrnesconsulting.com and follow @ByrnesConsultin.