JPMorgan’s Kelly: Don’t Overreact To Election Results

Stocks slid the day after the re-election of President Obama.

And in a conference call Wednesday, J.P. Morgan Funds Global Chief Strategist David Kelly said: “The markets had a bad day today,” calling it a “hangover from the election results.”

But Kelly had this advice for investors and those who counsel them – especially those who had supported Republican challenger Mitt Romney. “I think that’s the first thing to say off the bat: Don’t overreact to any political result,” Kelly said on the call. “People will have strong emotional reactions to what happened yesterday,” he said, adding that it’s also “important to remind them to invest based on logic rather than emotion.”

Kelly pointed out that the average return from the stock market over the past 75 years if approximately 10%. But, in the years when the federal government is split between a Democratic president and a Republican Congress, the average return is 15.4%.

In reviewing the results, Kelly noted that the “polls got it right.” Obama handily won the Electoral College vote and grabbed more than 2 million of the popular vote. In addition, the President’s Democratic Party increased its majority in the Senate and even picked up seats in the Republican-controlled House of Representatives. “The President’s ‘get out the vote’ machine was really well organized,” Kelly said. And his popular vote majority is “important for a mandate” Kelly said.

With this outcome, there will be more pressure on Republicans to compromise, Kelly said. He said there were three possible scenarios when it comes to the fiscal cliff: early compromise, last-minute compromise and overdue compromise.

Under the last scenario, the government would allow us to go over the cliff but in the early days of 2013, patch it together. However, Kelly warned, it would have to be done very early or companies would be forced to hold money from employee paychecks among other bad results.

“A December compromise would be best,” he said, noting that would be the early situation.

“Either way, any way, there will be a compromise,” Kelly predicted. And the President and Congress need to build a “fiscal ladder” to avoid a recession and stoke the fires of economic recovery by extending the Bush tax cuts and some of the payroll tax cuts, Kelly said. “This is doable.”

But, if there is no compromise, Kelly said, “There will be a white hot rage in America and it will be directed at whoever seems the most intransigent. It is easy for the President to look like he is willing to compromise [and make the House look like it wasn’t].

If the compromise appears to adopt higher taxes, people will sell off stocks, Kelly says. But if there are higher taxes imposed on dividends one result will be that companies may pay out before the higher tax rates kick in and “you could see income frontloaded into the fourth quarter of 2012.”