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Election: Status quo would be stock market nightmare

October 5, 2012: 7:50 AM ET

Investors are watching the race for the White House like hawks because, when it comes to the fate of the fiscal cliff, there is a lot riding on the Nov. 6 election.

Given all the partisan bickering over how to solve the nation's growing debt, and more immediately, how to avoid the simultaneous onset of tax increases and spending cuts that will be triggered on Jan. 1, the worst possible outcome would be status quo in Washington, said BlackRock's iShares global chief investment strategist Russ Koesterich.

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"With a Republican sweep, investors can remove the risk of tax hikes, and with a Democratic sweep, there will also be an agreement that allows the economy to avoid the fiscal cliff," said Koesterich. "But with an Obama win, a Republican House and a Democratic Senate, there will just be more heated discussions and a greater likelihood that we will fall over the cliff."

The ramifications of political brinkmanship? Of 17 top economists surveyed  by CNNMoney, 14 believe that Washington's failure to address the fiscal cliff would cause the economy to tumble into a new recession. And that would throw financial markets in turmoil.

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Though it wouldn't be pretty, Koesterich said the one bright spot with reaching the fiscal cliff would be the buying opportunity it would create in financial markets. But leading up to that point, Koesterich recommends a defensive approach. Socking money away in dividend-paying blue chip stocks would be among those safe defensive moves.

Though the fiscal cliff is a big risk for the market in the short-term, Koesterich notes that the election outcome won't have much of an impact on portfolios over the long-term.

"There's no historical evidence that proves a Democratic or Republican president is better for the stock market, or that divided government is good for the market," said Koesterich. "It's all a myth."

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