Happy Guy Fawkes Day: Investment Implications of the Republican Rout of Congress

Remember, remember the Fifth of November,
The Gunpowder Treason and Plot,
I know of no reason
Why the Gunpowder Treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, 'twas his intent
To blow up the King and Parli'ment.
Three-score barrels of powder below
To prove old England's overthrow;
By God's mercy he was catch'd
With a dark lantern and burning match.
Hulloa boys, Hulloa boys, let the bells ring.
Hulloa boys, hulloa boys, God save the King!

–Traditional English nursery rhyme

Today, November 5, is of course Guy Fawkes Day, the day that the English remember one of their most notorious villains or most celebrated heroes, depending on your politics.

On this day in 1605 Fawkes, a disgruntled English Catholic rebel, attempted to take down the entire English government—king, ministers, parliament and all—by blowing up the House of Lords during the State Opening of Parliament.

Fawkes was discovered and promptly executed, but he remembered—in typically dry English humor—as the last man to enter parliament with good intentions.

I tell this story because anti-government sentiment is rather extreme these days. While the Tea Partiers have no intentions of blowing up the Capitol building or White House, they have threatened to proverbially blow up President Obama's political agenda. ObamaCare—or at least parts of it—is at significant risk. It is also a near certainly that there will be no major stimulus plans coming out of Congress anytime soon.

The Republican leadership, if their rhetoric is to be taken seriously, intends to follow the lead of British Prime Minister David Cameron.  Austerity will be the new word of the day.

Only time will tell how events will play out, but certain developments would appear highly likely:

1. In the absence of fiscal stimulus from Congress, the Federal Reserve will likely feel an even greater responsibility to maintain monetary stimulus through an expansion of “QE2” or a similar program. Though Bernanke will likely face congressional pressure to show restraint, his actions throughout the crisis have proven that he is willing and able to act independently, regardless of congressional criticism.
2. Reeling from a major rebuke of his current policies, President Obama needs to do something fairly drastic to resurrect his approval rating and popularity. Look for him to make some kind of deal with the Republicans on at least a partial extension of the Bush tax cuts. High-income earners (those with annual incomes over $250,000) will almost certainly see their marginal tax rates rise to Clinton-era levels or at least close to them. Expect rates for the vast majority of voters to stay more or less the same. President Obama has also made indications that he would like to see the current low rates on dividends and capital gains extended.

So what, if anything, does all of this mean for the markets? Given the recent surge in stock prices, investors do not seem to be overly concerned. Taxes are unlikely to rise enough to have a meaningful impact on the economy or corporate earnings. Meanwhile, the Fed's actions are likely to “juice” the markets with liquidity for at least a few more months.

Bottom line: The Fed and Congress are making decisions that will have long-term implications for the health of the American economy. Eventually, we will all pay the price for loose monetary policy and deficit spending. But in the meantime, investors might as well profit from what should be a liquidity-induced bull market that should last well into the next year.

Charles Lewis Sizemore, CFA

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