Wall St prepares for four more years

With the outcome of the US elections now known the market can attempt to return to some level of normalcy. While the fiscal cliff is coming rapidly into view the odds are improving that US lawmakers are ready to cut a deal.

But regardless of the outcome of these negotiations, as important as they are, the market now has more certainty about the political outlook than at anytime in the last 12 months. Accordingly, key sectors can ready themselves for another four years.

A financial hangover

The financial services sector, particularly banks, would have awoken on November 7 with a post-election hangover. Having financially backed Governor Romney 2:1 the sector now has to deal with the ramifications of a President who owes them nothing. Adding insult to injury is the election of a number of anti Wall St candidates to the US Congress, most notably the election of Elizabeth Warren to the Senate.

Ms Warren was the President's choice to head the new consumer financial protection agency born out of the Dodd-Frank reforms but her appointment was prevented by Senate Republicans off the back of intensive lobbying from the banking sector. She is now part of an increased Democratic majority in the Senate.

Besides from being confronted with their nemesis the industry will now have to contend with the full introduction of the Dodd-Frank reforms. While some financial service lobby groups are publicly advocating for amendment, if not a wholesale wind back, a number of the larger industry players appear to have accepted the inevitable and are switching their focus to implementing and dealing with the reforms. For example, Morgan Stanley and Goldman Sachs have both wound down their proprietary trading desks, which are banned under the laws.

Perhaps the only area of real contention remaining are the Dodd-Frank restrictions on derivatives trading, which a number of industry players are still proposing to lobby hard against.

Drill baby drill – but carefully

Hopeful of a Romney presidency in which exploration and drilling rights would be relaxed the oil and gas sector is now contemplating a more restrained and renewables friendly regime under a second Obama term.

The President is not immune to the important role of fossil fuels in meeting America's energy needs. However, he's more inclined to balance energy and environmental needs and push the nation towards self-sufficiency through an increased reliance on renewable sources. His victories in Virginia and Ohio – two coal producing states – will give him comfort that his approach to mining is not necessarily seen as detrimental to coal workers.

The biggest concern for the sector will be Obama's well publicised opposition to the more than $4bn worth of tax credits and other concessions received by the industry. They are likely to become a key component of the President's efforts to increase revenues through closing tax loopholes.

Let's all get well together

Obamacare has survived its most important test – a US presidential election. There can be no doubt that Americans voting for Obama knew it would mean health care reform would be staying put. The sector will now be able to move – for better or worse – with a sense of certainty about the permanency of Obamacare.

Insurers will need to prepare for the influx of new customers and their accompanying risk profiles. Pharmaceutical companies will need to adjust to provisions requiring them to provide discounts on branded drugs to Medicare recipients. Medical device manufacturers will need to prepare for a new sales tax and hospitals can look forward to reduced bad debt, as former bad payers will now be covered by insurance.

Much of these reforms still require supporting regulation but the trajectory of health care law is clear.

Strength through careful spending

Any budget deal will have to address the sizeable defense expenditures. The industry is immediately confronted with $500bn of cuts due to be implemented in 2013 but the President is already on the record as being willing to find a way to delay those cuts.

The extent of industry cuts as a result of the forthcoming budget negotiations are unclear but the sector will need to prepare for some form of reduction and adapt to Obama's clear intention of making the US military leaner and meaner.

It hurts to back a loser. But that's exactly what a large section of Wall St did in the lead up to the 2012 presidential election. They'll now have to take a large dose of reality and quickly figure out which battles are worth fighting.

No President wants to be at war with corporate America but this one has shown a willingness to fight Wall St. Having won a now famous victory he may be less inclined to compromise than many assume. Market players will now have to think very carefully about their approach to upcoming regulatory challenges. Such an approach necessitates accepting the electoral verdict.