Change we can believe in?
The US share market initially welcomed Barack Obama’s election, with the S&P500 index staging an encouraging 4% rise. Unfortunately, the optimism was short-lived, and by mid-November the market had lost almost 14% since Election Day. The President took office on 20 January, so the market may have been responding to the significant challenges the US economy is facing right now. So what can investors now expect?
More stimulus and new directions
Barack Obama has stated that he will do whatever is necessary to get the economy moving again, and with his economic team now named, it’s clear that he has gone for experience and talent rather than ideology. One interesting appointment is Christina Romer as the Chairwoman of the Council of Economic Advisers. An expert in the causes of the Great Depression, she is just one member of the Obama team with expertise in steering the US through past economic crises.
Greater spending is likely to be a key plank in the recovery, including aid to the desperate car industry. Obama plans on creating 2.5 million new jobs, aided by spending on infrastructure such as roads, bridges and schools. Other areas expected to benefit are green energy and low-emissions vehicles.
A bigger deficit
Overall, Obama is set to cut taxes, and on the back of higher spending, something has to give. The new president is seeking to cut waste from ineffective programs, but the US deficit, already large due to the cost of the Iraq war, is set to climb. In the short term, the potential gains from the stimulus probably outweigh the risks, but that deficit may hold back the US economy in the future.
Barack Obama has committed to taking action on climate change with an 80% cut in US greenhouse gas emissions by 2050. He plans to spend US$150 billion on renewable and alternative energy over the next 10 years. These moves should be good for investors in renewable energy. With plans to save more oil than the US imports from the Middle East and Venezuela combined, fossil fuel prices may suffer in the long term.
More broadly, the market responds well to stimulus packages, not just in the US, but also in Europe and Asia. George Bush is unlikely to do anything substantial before his exit from the Oval Office, but Obama has urged the Democrat-controlled Congress to work on an aggressive recovery plan that he can sign into law on the day he is inaugurated. The President-Elect won’t put a figure on the size of the package, but investors who believe in Obama’s change might want to position themselves ahead of that date.
A tough job
America’s new President inherits a mess and it may be too much to expect miracles from one person. However, the commodity in shortest supply on investment markets at the moment is confidence—something that Barack Obama appears capable of delivering. Investors can also take hope from the observation that, since 1945, the US share market has performed much better when there is a Democrat in the Whitehouse. Let’s hope that trend continues.
Sources:
http://change.gov/
http://my.barackobama.com/page/content/newenergy
Oliver’s Insight #34 – 5 November 2008. AMP Capital Investors – www.amp.com.au
http://www.theage.com.au/world/steady-hands-sign-on-to-team-obama-20081125-6hed.html?page=-1