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The Thomson Reuters/University of Michigan preliminary reading on the overall index on consumer sentiment rose to 84.9 from 82.6 in October, topping economists' expectations for 83. This reading was a five year high for the index and should be taken as a "sell on the news" event. This reading hit a high due mostly to the hope that American voters had that their candidate would win the election. Now that half the population is extremely disappointed and possibly even depressed this will mark the high water mark of this index for possibly the next two years and likely for at least the next four months.

The election is over and politically speaking we will have the status quo for the next two years. Political gridlock in Washington means that in the near term, there will be much uncertainty regarding US tax policy and US spending. Gridlock, however, also means that there will be complete certainty with regard to legislation that was enacted over the past four years. The Affordable Healthcare Act (Obama care) will be fully implemented and Republicans will have almost no ability to stop its implementation. In addition, the Wall Street Reform and Consumer Protection Act (AKA Dodd Frank) will also be fully implemented. These two major pieces of legislation will have profound long-term effects on the US economy, due to the sheer size and scope of this legislation's reach in our economy. Because of the near-term uncertainty and some of the long-term certainty, investors should be making some adjustments to their portfolios to lower volatility in the short term and they should look for longer term investment opportunities given what they believe are the most likely economic outcomes over the next 3 to 5 years.

Near-Term Volatility and Uncertainty

Beginning on January 1st of 2013, if nothing changes legislatively between now and then, US tax policy will revert back to pre-2001 policy. The number of changes and the vast number of effects that this will have on everyone are too numerous to list for you in this email; However, here is a link to a site that you can review if you like to see how this reversion may affect you in your everyday life.

All of this uncertainty regarding tax policy becomes "turbo charged" when one adds in the effect of the "fiscal spending cliff" that was put in place in late summer of 2011 when Republicans and Democrats could not agree to raise the US debt limit. A "temporary fix" was put in place at that time that allowed the debt ceiling to be raised as long as a legislative super committee would be convened to put together major budget legislation. The super committee would have to go in a room, compromise, and present Americans with long-term fiscal legislation, OR ELSE!...or else what? Or else a major "fiscal spending cliff" would penalize all parties involved and drastically cut spending on defense and entitlements. Well the "super committee" was not super enough, and the US is now a couple of months away from this penalizing trigger to be pulled. If you would like to read more about the "fiscal cliff" here is a link that I recommend.

Due to the overwhelming and far reaching effects of this fiscal cliff all Americans are facing, many analysts believe that a compromise will be reached between Democrats and Republicans to prevent this from happening. My personal opinion on this is that logically a temporary fix makes sense in the same way that I would expect a rational person to get out of the way of an oncoming train. However, there is also a fairly high probability that Republicans in the House of Representatives will dig in their heels regarding higher taxes just on the wealthy. Why would they do this? Why would they allow the train to run over us? The answer lies with the large block of Tea Party backed representatives that do not think that sequestering 108 billion from a budget that overspends by one trillion is such a bad thing. In addition, many of these representatives believe that Obama and the Democratic Party leaders will blink when it comes to raising taxes on their constituents. One final reason is that Republican legislators believe that they have an ace in the whole with another debt ceiling raise that will become necessary in February or March of 2013.

So you see in the next two months there is much uncertainty that will affect every American and everyone's investment portfolio. For the year, most portfolios have returned very nice returns on a year to date basis. Therefore, many will be looking to reduce some of their exposure to this short term uncertainty by taking some profits and possibly doing some tax loss selling in taxable accounts. In addition, as the political turmoil rises, I expect there to be a minor panic in the market that will cause it to pull back to 1330 on the S&P 500. At that level, there will be a multitude entry points into long-term equity investments.

Stocks to Sell Right Now

I would be a seller of major banks, regional banks and retailers in the near-term-- Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), New York Community Bank (NYB), Fifth Third Bank (NASDAQ:FITB) as well as Tiffany (NYSE:TIF), Coach (NYSE:COH), Macy's (NYSE:M), and Target (NYSE:TGT) --these are examples of stocks that have had a nice run in 2012, but will likely get hit hard in the next few months.

Longer Term Market Opportunities and Pitfalls

Every election over the past 200 years has offered opportunities to make smart investments that will benefit from the consequences of those elections. In the case of this year's election there will be some great sectors to look for those opportunities and some sectors that it may be better to stay away from. In addition, even within a sector there will be sub sectors that will outperform others based on legislation that is already law and highly likely to become fully implemented. For example, here is a quick visual decision tree that I put together regarding the US Healthcare Sector:

Affordable Healthcare Act Fully Implemented = Yes

Health Insurance Companies = Avoid

Medical Device Companies = Avoid

Publically Trades Hospitals = Invest

Medicaid Managed Care Companies = Invest

Diagnostic Device Companies = Invest

The most likely longer-term effect of this election is a high probability for "Stagflation". Stagflation is an economic term that describes slow or no GDP growth accompanied by high inflation. This economic scenario is now one of the highest probabilities for the US economy over the next 12 to 24 months. A slow growth economy propped up by the Fed continuing to print US dollars via Quantitative Easing will keep GDP on "life support" but it will lead to higher energy, food, fuel, and commodity prices. Under this scenario there will be opportunities to make money in gold, silver, copper, oil, real estate trusts and food & agriculture companies.

On the flip side, the "Stagflation" scenario above bodes poorly for bonds, fixed rate investments & US Dollar (cash). These asset classes will likely need to be avoided on a longer duration basis. It would not be prudent to park cash or buy long-term bonds over extended periods of time as these investments will lose value and should be considered an investing "pitfall". Once the near term volatility subsides, investors should look to sell their most high quality bonds at a profit and look for equity opportunities or possibly go short the dollar and US Treasuries.

There are other opportunities that currently exist in the technology area that will revolutionize communication and data in the future. I believe that American ingenuity will always increase productivity which will slightly help with reducing inflation in labor costs and speed up the flow of information to a smarter and smarter consumer. This is a topic for another day. I will be putting together a buy list over the next month and share it with you. Until then, get your capital to a safe place as the financial super-storm approaches.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I have recently sold positions in BAC, JPM, NYB, and M. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.