Mitt Romney claimed a solid victory in the Florida presidential primary on Tuesday and now some market watchers may be wondering what this means for the US economy.
In the very near term, the short answer is not much. While Romney will no doubt savor his victory, investors have some time before the race for the presidency starts to dominate the investment landscape.
In fact, investors aren’t likely to focus on the election until this summer when we get closer to the Democratic and Republican National conventions. For now, investors will instead continue to focus on ongoing developments in Europe and new US economic data. Early Wednesday, for instance, markets were up on positive headlines out of Europe and news that the Institute for Supply Management (ISM) headline number grew in January at its fastest pace in at least seven months.
This fall, however, the outcome of the election will be critical for next year’s economy and market performance. A major issue for the economy is the massive fiscal drag that will hit the United States next year. Just Tuesday, the Congressional Budget Office commented on how detrimental this is likely to be for the US economy in 2013. Given the fragile nature of the recovery, the combination of tax hikes and spending cuts scheduled to hit next January may jeopardize the recovery.
In light of this pending risk, investors need to assess which election outcome will be able to adequately address the fiscal drag issue. Remember, there will be a relatively narrow window between election day and January 1st during which existing policy can be changed.
So looking forward, what’s the bottom line for the economy of the Florida results? First, the magnitude of Romney’s win in Florida makes it likely that he’ll clinch the Republican nomination and means that talk of a divided Republican party and bruising nominating contest were probably exaggerated.
Even more, given that virtually every national poll suggests that an Obama vs. Romney match-up is likely to be competitive, particularly compared to an Obama vs. Gingrich race, there’s now a greater likelihood of a Republican presidential victory. If a Romney victory was combined with a scenario in which the Republicans keep the House and take the Senate, there would likely be an increased chance that some of the fiscal drag — arguably the part associated with the expiration of the Bush Tax Cuts – wouldn’t occur next January.
That said, a victory in the Florida primary is a long way from a sweep in November. While a Romney nomination appears more likely, a Romney win is still far from guaranteed. Since World War II, only three incumbents have lost the presidency. In each case, the president faced a primary challenge from within his party, something President Obama hasn’t had to concern himself with.