Wednesday, November 7, 2012

Obama wins but U.S. deeply divided

Fresh from a decisive re-election win, President Barack Obama returns from the campaign trail on Wednesday with little time to savor victory, facing urgent economic challenges, a looming fiscal showdown and a still-divided Congress able to block his every move.

Obama defeated Republican challenger Mitt Romney on Tuesday night in a grueling presidential race and used his acceptance speech in front of a huge cheering crowd in Chicago to strike a conciliatory note toward his political opponents.

But in the cold light of the 2012 election's morning-after, it was clear that even though voters have endorsed a second Obama term, the president will have a hard time translating that into a mandate to push forward with his agenda.

Americans chose to preserve the status quo of divided government in Washington. Obama's fellow Democrats retained control of the Senate and Republicans kept their majority in the House of Representatives, giving them power to curb the president's legislative ambitions on everything from taxes to immigration reform.

This is the political reality that Obama - who won a far narrower victory over Romney than his historic election as the country's first black president in 2008 - faces when he returns to Washington later on Wednesday.

House Speaker John Boehner, R-Ohio, spoke of a dual mandate. "If there is a mandate, it is a mandate for both parties to find common ground and take steps together to help our economy grow and create jobs," he said.

Senate Republican Leader Mitch McConnell of Kentucky had a more harsh assessment.

"The voters have not endorsed the failures or excesses of the president's first term," McConnell said. "They have simply given him more time to finish the job they asked him to do together" with a balanced Congress.

Obama's more narrow victory was nothing like the jubilant celebration in 2008, when his hope-and-change election as the nation's first black president captivated the world. This time, Obama ground it out with a stay-the-course pitch that essentially boiled down to a plea for more time to make things right and a hope that Congress will be more accommodating than in the past.

The most pressing challenges immediately ahead for the 44th president are all too familiar: an economy still baby-stepping its way toward full health; 23 million people out of work or in search of better jobs; civil war in Syria; a menacing standoff over Iran's nuclear program.

Sharp differences with Republicans in Congress on taxes, spending, deficit reduction, immigration and more await. While Republicans control the House, Democrats have at least 52 votes in the Senate and Republicans 45. One newly elected independent isn't saying which party he'll side with, and races in Montana and North Dakota were not yet called.

Votes also were being counted Wednesday in the Montana and Washington gubernatorial races.

Obama's list of promises to keep includes many holdovers he was unable to deliver on in his first term, such as rolling back tax cuts for upper-income people, overhauling immigration policy and reducing federal deficits. Six in 10 voters said in exit polls that taxes should be increased, and nearly half of voters said taxes should be increased on incomes over $250,000, as Obama has called for.

"It's very clear from the exit polling that a majority of Americans recognize that we need to share responsibility for reducing the deficit," Maryland Rep. Chris Van Hollen, the top Democrat on the House Budget Committee, told CNN. "That means asking higher-income earners to contribute more to reducing the deficit."

Even before Obama gets to his second inaugural on Jan. 20, he must deal with the threatened "fiscal cliff." A combination of a $600 billion package automatic of tax increases and steep across-the-board spending cuts are set to take effect in January if Washington doesn't quickly reach a budget deal. Experts have warned that the economy could tip back into recession without an agreement.

Newly elected Democrats signaled they want compromise the avoid the fiscal cliff.

Sen.-elect Tim Kaine, a former Virginia governor who defeated Republican George Allen, said on NBC's "Today" show that voters sent a message they want "cooperative government." But he also says the election results show that the public doesn't want "all the levers in one party's hands" on Capitol Hill.

From Massachusetts, Elizabeth Warren said on "CBS This Morning" that those who voted for her opponent, Republican Sen. Scott Brown, expressed a desire for lawmakers to work together. She says: "I heard that loud and clear."

December surprise?

Investors have had a tendency to downplay problems emanating from Washington only to find themselves surprised when lawmakers cannot get together on critical issues.

The market reacted harshly to Washington gridlock after failed legislation to backstop the banks in 2008 and again during protracted talks to raise the U.S. debt ceiling in 2011. Strategists said a re-elected Obama would be keen to avoid another bruising repeat.

"The president entered office with the economy in a recession. I don't think he wants to preside over a recession in his second term," said Jeff Applegate, chief investment officer at Morgan Stanley Wealth Management. "I think you have a president concerned about his legacy, and I don't think he wants to leave his presidency with a sea of red ink."

Whitney Tilson, a hedge fund manager and one of the only managers in the $2 trillion industry publicly to endorse Obama for a second term, said he was optimistic that the two parties would compromise.

"This was a victory for moderates," he said. "I hope both parties recognize this and move toward each other - to the center - to address the pressing problems our country faces."

The end of the drawn-out election campaign will put to rest short-term questions about regulation and monetary policy, but some investors remained on edge about taxes and overall economic health.

Billionaire investor George Soros said late Tuesday that the re-election of Obama will open "the door for more sensible politics."

Soros, a major contributor to Democratic causes, said in an email exchange with Reuters that he hoped "the Republicans in office will make better partners in the coming years.

Clarity on the Fed

Although markets came into the night expecting Obama to win, most traders and investors supported Romney, who raised more money on Wall Street than the incumbent.

Obama's win did remove uncertainty about the future of Fed policy. Romney had said he would replace Bernanke, whose dovish monetary policy has helped propel gains in both U.S. bond and stock prices in recent years.

Benchmark bond yields hit record lows despite a downgrade of the U.S. credit rating last year and fell further on Wednesday after the election results became clear, shedding 11 basis points to 1.64 percent.

Cumulative returns for maturities on all U.S. Treasuries are at 14 percent since Obama took office, according to Barclays.

The Fed's easy-money policy has pushed down the value of the dollar, though, and some worry more dollar weakness may be in store, particularly if investors see signs of rising inflation.

"The market rewards this certainty by bidding up gold and selling the dollar against all major currencies," said Axel Merk, president of Merk Investments in Palo Alto, California.

Under a second Obama presidency, Wall Street will have to forgo trying to repeal Dodd-Frank financial reforms and instead continue to use personal relationships in Washington to keep the law from harming firms, said Karen Shaw Petrou of Federal Financial Analytics, a Washington-based research firm.

Wall Street has bristled at the reforms, which include stricter capital requirements for banks, and the Volcker Rule, which is intended to stop banks from making bets in the financial markets with insured deposits.

But some welcomed the changes.

"I don't think any reasonable observer would want to go back to the risk that we had in the system before the financial crisis," said Evercore Chief Executive Ralph Schlosstein.

Associated Press and Reuters contributed

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