Investors pondering effects of election
President-elect Barack Obama’s victory has cleared up some uncertainty while raising new questions as investors adjust to the first Democratic sweep of Congress and the White House in 16 years.
Obama’s pledge to raise taxes on wealthier individuals could make municipal bonds and other tax-sheltered investments more popular while turning the stock market less attractive on balance.
Obama inherits a weak economy marked by rising unemployment, declining output, slumping retail sales and debt-strapped consumers. The stock market’s initial selloff after the election likely reflects a dose of sobriety as the excitement starts to wear off.
“What Sen. Obama may find is that it’s easier to get the job than to do the job,” said Stanley Rulapaugh, an investment adviser in Scottsdale, Ariz.
The president-elect clearly will play a big role in shaping the government’s handling of the economy and financial-industry rescue.
Already, Democrats are pondering new stimulus measures.
The economy was the top issue on the minds of voters, and it will be a priority for Obama and the new Congress. But it also might tie their hands to some degree.
“Governments are like households – when money is tight, new spending gets close scrutiny,” wrote Robert Doll, a global chief investment officer for investment firm BlackRock Inc. in a post-election analysis. “Simply put, it doesn’t appear that there is enough money available to enact every program Obama has proposed.”
In other words, policies might have to take a back seat to pragmatism.
New stimulus actions under Obama and his fellow Democrats might include extended jobless benefits, a moratorium on foreclosures, tax relief for lower- and middle-class people and new infrastructure spending.
“In the near term, the most critical appointment Obama will make is the next Treasury secretary,” said Keith Wibel, an investment adviser at Foothills Asset Management in Scottsdale. “Dealing with the economy comes first.”
If Obama is able to follow through on his pledge to eliminate low current tax rates on long-term capital gains and dividends, that would clearly rankle many investors.
“We think higher tax rates for investors will be a headwind for (stocks), albeit not an insurmountable one, in the years ahead,” Doll wrote.
Another headwind is having both the White House and Congress under the control of a single party. Historically, stocks have fared better during periods of “gridlock” in the political arena.
“I hope we won’t go too far to the left because extremes are never good for the market,” said Grace Lau, an investment adviser at PacWest Financial Management in Phoenix. “We don’t want to take away the incentive to be productive, for both individuals and companies.”
In fact, years when Democrats controlled the White House, Senate and House have been marked by low returns, with the Dow Jones Industrial Average rising just 6.6 percent on average excluding dividends, according to the Stock Trader’s Almanac 2009, which examined results over the past six decades.
That’s the lowest return of the various combinations represented by either Republican or Democrat control of the White House, Senate and House.
By contrast, the Dow since 1949 has generated an average return overall of 8.7 percent excluding dividends. Years of Democrat presidents and GOP control of both houses of Congress have produced the best results, up 19.5 percent on average.
Rulapaugh predicts the potential for heightened regulation under Obama, especially in sensitive industries such as oil, could lead to a flurry of mergers and acquisitions over the next couple of months.
“I think we might have a binge of buyouts before Obama takes office,” Rulapaugh said.