Obama: a platform of change to stimulate the economy?
This article was sent to SFS investment clients on 6 November 2008.
In his first television interview since his historic election victory, Democrat President-elect Barack Obama said stimulating the economy was a top priority – even if it meant adding to the nation’s growing deficit.
“I think what’s interesting about the time that we’re in right now is that you actually have a consensus among conservative Republican-leaning economists and liberal left-leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again, that we’re gonna have to spend money now to stimulate the economy,” Obama said.
“And that we shouldn’t worry about the deficit next year or even the year after, short term, the most important thing is that we avoid a deepening recession.”
Obama said his goals would be to restore consumer confidence and re-regulate the financial market. His first legislative goal is to pass an economic stimulus package. But he has also said that his administration “‘can’t afford to wait on moving forward on the key priorities that I identified during the campaign, including clean energy, health care, education and tax relief for middle-class families’”.
According to Dr Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, key aspects of an Obama administration are likely to be:
- A new fiscal stimulus package, much larger than that seen earlier this year, which is likely to be enacted early next year. Although given the US Government’s already huge borrowing program (reflecting the existing deficit plus numerous measures to deal with the current crisis), Obama’s scope to stimulate is limited somewhat.
- More active Government intervention to prevent home foreclosures and increase bank lending, particularly by banks receiving government assistance.
- Tax cuts focused on low and middle income earners, but tax increases for high income earners (back to pre-Bush top marginal tax rates).
- An increase in tax rates on dividends and capital gains from 15%, but possibly only to a top rate of 20%.
- Increased regulation of business, particularly the financial sector. (This is inevitable in most countries after the current crisis.)
- Increased Government spending in areas like health, education and infrastructure.
- A commitment to free trade, but more incentives for US companies to create jobs in the US.
- More concern about the environment and introduction of a carbon emissions reduction scheme.
- A more multilateral approach to the “war on terror” and to foreign policy generally.
But will Obama’s election victory and a more pragmatic economic policy be enough to have a positive affect on the current US financial climate?
Dr Oliver believes that the Democrats’ increased majorities in both Congress and the Senate put President-elect Obama in a good position to implement his policies, and will enable the US Government to have a more decisive approach to dealing with current financial and economic challenges. This is in contrast to the debacle seen in late September/early October in trying to pass the bank rescue program.
“The conventional view is that a Democrat victory will be negative for shares, via higher taxes and more regulation,” Dr Oliver states.
“And statistics suggest that US shares perform better in the year after an election when an incumbent Republican party wins, as opposed to when an incumbent Republican party loses.”
Dr Oliver believes there are 5 key reasons why Barack Obama’s election victory may well turn out to be positive for US shares.
“Firstly, this year’s presidential election has been a side show, with shares plunging in response to the turmoil that the US sub-prime mortgage crisis has caused, which is very different to the prevailing conditions in the run-up to the last 2 elections. Given the scale of the problem now facing the US, it’s likely that developments in relation to the credit crisis will continue to dominate politics in terms of share market impact. Getting the election out of the way may help.
“Secondly, a Democrat victory doesn’t necessarily mean a bad outlook for the market. After the 1976 Carter victory over a Republican incumbent, shares performed below par in the aftermath of the election, but shares did better than normal after Clinton’s 1992 victory.
“Thirdly, it’s possible that investors will welcome a change of Government in the US. The Bush Administration has lost credibility after having prevailed over 2 bear markets, 2 recessions, a big policy failure with the sub-prime mortgage debacle and became bogged down in Iraq. This loss of credibility may have harmed the US Government’s ability to deal successfully with the recent financial turmoil. A change in direction may be seen as a positive new start.
“Fourthly, with the credit crunch and a loss of confidence, a more interventionist government policy may be viewed by many investors as what is needed right now.
“Finally, the historical record indicates US shares have actually done better under Democrat presidents.”
With Barack Obama’s aggressive approach to dealing with the current US financial and economic crisis, there is no reason that the new US Administration will be negative for shares, and, if anything, may well turn out to be a positive for US shares. Given the role that the US share market plays in setting the direction for most global share markets including Australia’s, the same would apply to them as well.
Source: “The implications of Barack Obama’s election victory”, Dr Shane Oliver
Tags: economic outlook, global change, investment